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Chapter 8

Working Capital
Management
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01

SOTEN ECVARILEEB

are a balance sheet item that records the value of promissory notes that a
business is owed and should receive payment for.
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01

NOTES RECEIVABLE

are a balance sheet item that records the value of promissory notes that a
business is owed and should receive payment for.
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02

EDBT DCUERIONT

refers to measures to reduce or refinance debt in order to make it easier for

the borrower to repay it.
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02

DEBT REDUCTION

refers to measures to reduce or refinance debt in order to make it easier for

the borrower to repay it.
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03

SHAC MEGEANAMTN

is the monitoring and maintaining of cash flow to ensure that a business has
enough funds to function.
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03

CASH MANAGEMENT

is the monitoring and maintaining of cash flow to ensure that a business has
enough funds to function.
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04

QDLUIIIYT AGENAMNEMT

is the proactive process of ensuring a company has the cash on hand to

meet its financial obligations as they come due.
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04

LIQUIDITY MANAGEMENT

is the proactive process of ensuring a company has the cash on hand to

meet its financial obligations as they come due.
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05

CCNTSAOU BYAAPEL

is the money a company owes its vendors, while accounts receivable is the
money that is owed to the company, typically by customers.
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05

ACCOUNTS PAYABLE

is the money a company owes its vendors, while accounts receivable is the
money that is owed to the company, typically by customers.
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PROJECT
WORKING CAPITALSCOPE
PROJECT MANAGEMENT
SCOPE
Working capital is the amount of funds available to finance current
Project scope refers to the specific goals, deliverables, tasks,
Project scope
expenditures. Therefers to the
company's specific
working goals,
capital deliverables,
is made tasks,
up of its current
and timelines that are defined for a project.
and timelines
assets that are
minus its current defined for a project.
liabilities.

Working capital management refers to the set of activities performed by the management to
Project
make sure scope refers has
that the company to enough
the specific
resourcesgoals, deliverables,
for day- to-day tasks,
operating expenditures
Project scope refers to the specific goals, deliverables, tasks,
and timelines that are defined for a project.
and payments for obligations while maintaining other resources invested in income
and timelines
producing activities. that are defined for a project.

Project are
Assets scope refers toresources
economic the specific goals, deliverables,
controlled by the entity.tasks,
Assets
Project scope refers to the specific goals, deliverables, tasks,
and timelines
may thatas
be classified are defined
current orfor a project.
noncurrent.
and timelines that are defined for a project.
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Current assets include cash and other assets that can be easily converted into
cash within twelve months.

Current assets include the following:

1. Cash and Cash Equivalents
2. Marketable Securities
3. Trade Receivable
a. Notes Receivable
b. Accounts Receivable
4. Inventories
a. held for sale in the ordinary course of business;
b. in the process of production for such sale; or
c. in the form of materials or supplies to be consumed in the production process
or in the rendering of services.
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CURRENT LIABILITIES LIQUIDITY MANAGEMENT

Current liabilities are the loans

Making sure a business has
and commitments that a
enough cash on hand and easily
business must settle quickly,
convertible assets to cover its
typically within a year. Bills,
immediate liabilities is known as
short-term loans, and any sums
liquidity management.
that need to be paid off soon are
among them.
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CASH MANAGEMENT

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Cash management, also known as treasury Cash is the primary asset individuals and
management, is the process of managing cash, companies use to pay their obligations on a
particularly cash inflows and outflows. In regular basis. In business, companies have a
business, cash is the king of all assets, it is a key multitude of cash inflows and outflows that
component of a company's financial stability must be prudently managed in order to meet
The level of cash should be enough to deal with current and long term obligations, and maintain
expected or unexpected needs, but not so high adequate revolving funds. Maintaining enough
to determine an inefficient allocation of capital. cash balance for current obligations while also
For individuals, cash is also essential for investing excess funds for the purpose of
financial stability while also usually considered earning a return are usually top concerns.
as part of a total wealth portfolio.
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A. REDUCING EXCESSIVE AMOUNT OF CASH IN HAND B. UTILIZING CASH EFFECTIVELY

*HERE ARE SOME PRUDENT WAYS TO *HERE ARE SEVERAL STRATEGIC WAYS TO
MANAGE EXCESS CASH: DEPLOY EXCESS CASH

1. INVEST IN SHORT-TERM INSTRUMENTS 1. INVEST IN MARKETABLE SECURITIES

• PLACE EXCESS CASH IN SHORT-TERM INVESTMENTS LIKE • INVEST IN SHORT-TERM, LIQUID SECURITIES SUCH AS
CERTIFICATES OF DEPOSIT (CDS) OR MONEY MARKET FUNDS. TREASURY BILLS OR MONEY MARKET INSTRUMENTS TO EARN
THESE INSTRUMENTS PROVIDE A MODEST RETURN WHILE SOME RETURN ON EXCESS CASH WHILE KEEPING IT READILY
KEEPING FUNDS READILY ACCESSIBLE. AVAILABLE.

2. DEBT REDUCTION 2. DEBT REPAYMENT

• USE SURPLUS CASH TO PAY DOWN OUTSTANDING DEBT. THIS • PAY DOWN OUTSTANDING DEBT TO REDUCE INTEREST
HELPS REDUCE INTEREST EXPENSES AND STRENGTHENS THE EXPENSES AND IMPROVE THE BUSINESS'S OVERALL FINANCIAL
FINANCIAL POSITION OF THE BUSINESS. HEALTH.
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C. MAINTAINING OPTIMUM BALANCE OF CASH TO MEET D. MANAGING CASH FLOWS - CASH RECEIPTS AND CASH
PLANNED AND UNEXPECTED EXPENDITURES DISBURSEMENTS

*HERE ARE SOME STRATEGIES TO ACHIEVE * HERE ARE STRATEGIES FOR MANAGING
AND SUSTAIN THIS BALANCE EACH ASPECT

1. CASH FLOW FORECASTING 1. DISCOUNTS FOR EARLY PAYMENTS

• DEVELOP ACCURATE CASH FLOW FORECASTS TO PROJECT • OFFER DISCOUNTS FOR EARLY PAYMENTS TO INCENTIVIZE
INCOMING AND OUTGOING CASH OVER A SPECIFIED PERIOD. CUSTOMERS TO SETTLE INVOICES QUICKLY. THIS CAN IMPROVE
THIS ALLOWS FOR PROACTIVE PLANNING AND HELPS IDENTIFY CASH INFLOWS AND STRENGTHEN RELATIONSHIPS
POTENTIAL SHORTFALLS OR EXCESS CASH.

2. WORKING CAPITAL MANAGEMENT 2. REGULAR MONITORING

• EFFICIENTLY MANAGE WORKING CAPITAL BY OPTIMIZING • MONITOR ACCOUNTS RECEIVABLE REGULARLY TO IDENTIFY
ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE, AND INVENTORY. AND ADDRESS ANY DELAYS IN PAYMENTS. UTILIZE AGING
STREAMLINING THESE PROCESSES ENSURES THAT CASH IS NOT REPORTS TO PRIORITIZE COLLECTIONS EFFORTS
TIED UP UNNECESSARILY
 CASH INTERNAL CONTROL MEASURES
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Internal control encompasses the policies and procedures that an organization

establishes to ensure that it operates in accordance with management's
intentions and that accountability is maintained for all transactions. This
includes the methods adopted by the organization to safeguard its assets, to
check the accuracy and reliability of its accounting data, to promote
operational efficiency, and to encourage adherence to prescribed managerial
policies.

This broad definition of internal control includes two different aspects of

control: administrative control and accounting control. Administrative (or
operational) controls are generally aimed at improving operating efficiencies or
otherwise controlling the activities of the organization. These controls are in
contrast to internal accounting controls, which are primarily directed at reliable
financial reporting (i.e., ensuring the accuracy and reliability of the financial
data and safeguarding assets.)
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In addition to CASH FLOW STATEMENT, the measurement to quantify the

efficiency of CASH MANAGEMENT are CASH RATIOS as discussed in
financial statement analysis and CASH CONVERSION CYCLE.

CASH CONVERSION CYCLE (CCC): metric that expresses the number of days
it takes for a company to convert its investments in inventory and other
resources into net cash flows from credit sales.

OPERATING CYCLE OR CASH CYCLE: it measures the number of days an

investment is tied up in the production and sales process before it gets
converted into cash less the number of days the company is allowed to pay
its payables without incurring any penalties.
 USING THE DATA OF FAITH
CORPORATION IN CHAPTER 3, THE
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RECEIVABLE:
are financial assets that represent a contractual right
to receive cash or another financial asset from
another entity.

ACCOUNTS RECEIVABLE
are open accounts arising from the sale of goods and

RECEIVABLE services in the ordinary course of business and not

supported by promissory notes.

MANAGEMENT NOTES RECEIVABLE

are those supported by formal promises to pay in the
form of notes.

RECEIVABLE MANAGEMENT
is all about ensuring that customers pay their invoices
on or before due dates.
) ) ) ) ) ) ) ) ) FUNCTION OF RECEIVABLE
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MANAGEMENT

1. CREDIT POLICY FORMULATION: A company may either follow a liberal policy

or stringent credit policy for providing credit facilities to its customers.

2. CREDIT EVALUATION: sometimes called credit rating involves examining the

credit worthiness of a customer before approving any credit amount and
terms.

3. CREDIT CONTROL: receivable management decides proper credit limit and

credit period to be extended to customers.

4. CUSTOMER RELATION: credit facilities are important for attracting and

retaining customers.
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THE OVERALL PROCESS RECEIVABLE
MANAGEMENT:

1 . Assessing customer's credit worthiness or credit rating.

2. Recording credit sales invoices.
3. Sending notices before due dates.
4. Recording collections.
5. Detecting complaints in due time.
6. Detecting late payments in due time.
7. Calculation of interest and/ or penalties on late payments.
8. Preventing bad debts.
9. Frequently scanning and monitoring customers for credit risks.
10. Maintaining good customer relations.
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OBJECTIVES OF RECEIVABLE
MANAGEMENT:

1. Optimize sales and profit by providing

credit facilities to customers.

2. Monitoring and avoidance of occurrence of

any overdue payment and non-payment.

3. Reduce risk of bad debts.

4. Avoiding invoice disputes.

5. Improving customer satisfaction.

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ADD A MAIN POINT ADD A MAIN POINT

1. Require Credit Approval prior to shipment. You will have problems collecting 6. Segregate duties. No one should be able to handle incoming customer
accounts receivable if an order is shipped to a customer with a bad credit payments and create credit memos, or else they will be able to take the
rating. Therefore, required the signed approval of the credit department on money and cover their tracks with credit memos.
all sales orders over a certain dollar amount.
7. Review accounts receivable journal entries. Accounts receivable
2. Verify contract terms. If there are unsual payment terms, verify them transactions almost always go through a sales journal in the accounting
before creating an invoice. Other wise, accounts receivable will contain software that generates its own accounting entries.
invoices that customers refuse to pay.
8. Audit invoice packets. After invoice are completed, there should be a
3. Proofread invoices, if an invoice for a large-dollar amount contains an error, packet file that contains the sales order, credit authorization, bill of lading,
the customer may hold up payment until you send a revised invoice. and an invoice copy.

4. Authorize credit memos. People who have access to incoming customer 9. Match billings to shipping log. It is possible that items will be shipped
payments could intercept incoming cash and then create a credit memo to without a corresponding invoice, or vice versa.
cover their tracks.
10. Audit the application of cash receipts. The accounting staff may
5. You should password-protect access to the billing software to prevent the incorrectly apply cash receipts to open invoices, perhaps not even applying
illicit generation of credit memos. them to the accounts of the correct customers.
) ) ) ) ) ) ) ) ) INTERNAL CONTROL CHECKLIST
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INVENTORY
MANAGEMENT

Inventory management should make sure there are

enough products to sell and materials to use for
production while avoiding excessive inventory stocks,
pilferages and obsolescence. Inventory management is
about the right stock, at the right levels, in the right
place, at the right time, at the right cost as well as right
selling price.
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INVENTORY INTERNAL CONTROL

There are two basic aspects of inventory

internal control:

1. Physical Control
2. Control of investment
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PHYSICAL CONTROL OF
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INVENTORY
- Every business requires a system of internal control that includes
procedures for the safeguarding of assets. Inventories, just like cash,
equipments and other assets are vulnerable to thefts. In general,
effective internal control of materials inventory includes:

A. A system of authorization and approval.

B. Segregatio of duties and responsibilities
- Requisition/Purchasing
- Custody
- Recording
C. Surprise audit should be made regularly
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CONTROL OF INVESTMENT IN
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INVENTORY

- The planning and control of the inventory investment requires careful

study in order to minimize cash outflow, costs of inventory handling or
storage, deterioration of quality, obsolescence and theft. One of the
most important objectives of inventory control is maintaining the
proper balance of inventory on hand, that desired quantity and quality
will be available when needed for efficient and uninterrupted
operations.
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1. The Economic Order Quantity "EQQ" model 3. The min-max method

Formula: 4. The two-bin system

AD = annual demand
OC= ordering cost 5. The ABC classification
CCPU= carrying cost per unit of inventory
6. Just in- time (JIT)
2. The Reorder Point (ROP) The ultimate aims of JTT can be expressed as:
Materials purchased / ordered - JIT to produce parts,
Reorder Point Materials received - JIT to go in production,
= average daily usage X average lead time Parts are completed - JIT to sub- assemblies,
Revised Reoder Point Sub-assemblies ready - JIT final assembly,
= Lead Time Quantity + Safety tock Finished products manufactured - JIT to be shipped to
customers/ for sale.
) ) ) ) ) ) ) ) ) INTERNAL CONTROL CHECKLIST
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) ) ) ) ) ) ) ) ) ACCOUNTS PAYABLE AND SHORT-TERM
DEBT MANAGEMENT
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Accounts payable arise from trade credit granted by suppliers for purchases on
account. Short-term debts (or short-term term financing) are loan obligations that
are expected to be paid or settled within one year.

Credit lines, collateralized loans, receivables discounting, international and local

letters of credit are common sources of short-term funding. Similar to managing
liquidity, controlling accounts payable and short-term debts should be centered on
ensuring that the business has adequate cash to fund unforeseen needs and short-
term operations without incurring undue financial risk.

Early payments could needlessly cut into the available liquidity, which could be used
for other profitable endeavors. In addition to harming the company's credibility and
commercial relationships, late payments may also lower the creditworthiness of the
enterprise.
 INTERNAL CONTROL
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Accounts payable controls are used to mitigate the risk of loses in the
payable function.

Three general categories:

1. Obligation to pay 2. Data entry 3. Payment

Recognizing and Accurate recording of Process of settling the

tracking amounts payables in the obligations by
owed to vendors. accounting system. disbursing funds.
 Thank You
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