GROUP 1

WORKING CAPITAL
MANAGEMENT
MAIGUE, YASIS, BARCELA, RIVERO, EUNICE

FINANCIAL MANAGEMENT
DEFINING
working capital
MANAGEMENT
DEFINING Working Capital Management
Management of current assets and
liabilities
To achieve a balance between
profitability and risk that contributes
positively to the firms value.
Working capital management is all about
RISK AND RETURN TRADE-OFF.
Generally, the higher the risk, the higher
the return. Thus, the yield curve is
upward sloping.
DEFINING Working Capital Management
To understand the relationship between profitability
and risk, let us understand the nature of current
assets.
Current assets are the least profitable assets of the
company.
Investment in working capital involves lower
return.
The lower the return, the lower the risk
Lower default risk
Investment in working capital more has given the
company a greater
liquidity
PROFITABILITY is INVERSELY related to LIQUIDITY.
Importance of Accurate
Financial Records
Maintaining accurate and up-to-date financial records is crucial
for the success and long-term sustainability of any business.
These records provide a clear picture of a company's financial
health, enabling informed decision-making and effective financial
planning.

Accurate records help businesses track income, expenses,

assets, and liabilities, ensuring compliance with tax regulations
and providing a comprehensive understanding of the company's
financial standing.
Fundamental Accounting
Principles
Accrual Basis Double-Entry Accounting
Revenues and expenses are recorded Every business transaction is recorded as a
when they are earned or incurred, not debit and a corresponding credit, ensuring
when cash is received or paid. the books are always in balance.

Consistency Full Disclosure

Accounting methods and practices must
Financial statements must provide all material
be applied consistently across reporting
information needed for users to make
periods to ensure financial statements
informed decisions about the company.
are comparable.
 Bookkeeping Basics
Record Double-Entry Journals and Reconciliation
Keeping System Ledgers
Bookkeeping involves Transactions are first
The double-entry system Reconciling bank
systematically recording recorded in a journal,
is the foundation of statements, accounts
all financial transactions, which is a chronological
modern bookkeeping. It receivable, and accounts
from sales and listing of all financial
requires that each payable helps identify
purchases to expenses activity. They are then
transaction be recorded any discrepancies or
and income. Maintaining posted to the
in at least two accounts - errors. This ensures the
accurate records is appropriate accounts in
a debit and a credit. This financial records
essential for the general ledger, which
ensures the books are accurately reflect the
understanding your serves as the central
always in balance. business's true financial
business's financial record of a business's
position.
health. finances.
Financial Statements
Balance Sheet, Income Statement, and Cash Flow Statement

Balance Sheet Income Cash Flow

Statement Statement
Provides a snapshot of a Measures a company's Outlines the inflows and
company's assets, financial performance by outflows of cash, helping
liabilities, and equity at a tracking its revenues, to understand a
specific point in time. expenses, and net company's liquidity and
income over a period of ability to meet financial
time. obligations.
 Understanding Debits
and Credits
Assets Equity
Items of value owned by The owner's claim on the
the business business
Liabilities
Obligations the business
owes to others

Debits and credits are the fundamental building blocks of accounting. Debits record increases in assets and
decreases in liabilities or equity, while credits record the opposite. Understanding how to properly record debits and
credits is essential for maintaining accurate financial records and preparing key financial statements.
 Payroll and Tax Compliance

Payroll Management Tax Compliance Employee Records

Accurately calculating employee Properly filing business taxes,
Comprehensive record-keeping of
wages, withholdings, and payroll including income, sales, and payroll
employee information, hours
taxes is critical for maintaining taxes, is essential to meeting legal
worked, benefits, and deductions is
compliance and avoiding costly obligations. Staying up-to-date on
necessary for accurate payroll
penalties. A robust payroll system changing tax regulations helps you
processing and demonstrating
ensures timely and precise maximize deductions and minimize
compliance with labor laws.
payments to your workforce. audit risk.
 Budgeting and Financial
Planning
Set Financial Goals Create a Budget
Determine your short-term and long-term Develop a detailed budget that tracks your
financial objectives, such as paying off debt, income, fixed expenses, variable expenses,
building savings, or investing for retirement. and savings. Review and adjust it regularly.

Manage Cash Flow Allocate Funds Strategically

Closely monitor your cash flow to ensure you Distribute your resources efficiently across different
have enough funds to cover your expenses financial priorities, such as debt repayment,
and avoid late payments or overdrafts. emergency savings, and investments.
 Analyzing Financial Performance
Key Metrics Trend Analysis Benchmarking Variance
Analysis
Analyze crucial financial Examine historical Compare your company's Investigate deviations
ratios like profitability, financial statements to performance against between actual and
liquidity, and solvency to spot trends, seasonal industry standards and budgeted/forecasted
assess the company's patterns, and changes competitors to gauge results to understand the
overall health and over time that provide relative strengths and underlying drivers of
identify areas for insights into the weaknesses. financial performance.
improvement. business's trajectory.
 Financial Forecasting
Methods
Top-Down Bottom-Up Rolling
Approach Approach Forecasting
Start with the company's Start with individual line Periodically update your
overall sales and work items and work your way forecast based on recent
your way down to up to the company's data and market
individual line items, such overall sales. This changes. This approach
as expenses and assets. approach is useful for offers a more dynamic
This approach is useful creating expense or and adaptable way to
for creating an annual revenue forecasts for a plan for the future.
budget. specific department or
project.
Effective Cash Flow
Management
Proper cash flow management is crucial for the financial
health of any business. This card explores strategies to
optimize cash flow, including improving invoicing
processes, managing expenses, and implementing cash
flow forecasting.

Learn how to maintain a healthy cash flow to

support growth and stability.
Conclusion and Key
Takeaways
In this comprehensive overview of business
accounting, we've explored the essential
principles, practices, and tools to help businesses
manage their finances effectively. By
implementing these strategies, you can drive
financial success and make informed decisions to
propel your organization forward.
General concepts of
working capital Management
Working capital management relates to the management
of short-term investment (current assets) and short-term
liabilities (current liabilities). Working capital is the
excess of current assets over current liabilities.

Working capital is a key metric used to measure a company's

short-term financial health and well-being. Working capital
management is a strategy that companies use to manage their
leftover cash.

by: rivero, angelica

General concepts of
working capital Management
Working capital management monitors cash flow, current
assets, and current liabilities using ratio analysis, such as
working capital ratio, average collection ratio, and
inventory turnover ratio.

The primary purpose of working capital management is to

enable the company to maintain sufficient cash flow to meet
its short-term operating costs and short-term debt obligations.
 net working capital

₱ 400,000 = ₱ 1,000,000 - ₱ 600,000

 working capital management ratios
Current assets
working capital or current ratio =
Current liabilities

average accounts receivable

average collection period = x 365 days
total net sales

cost of goods sold

inventory turnover ratio =
average inventory
 example #1
Current assets
working capital or current ratio =
Current liabilities

₱ 1,200,000 ₱ 500,000
1.5 = 0.25 =
₱ 800,000 ₱ 2,000,000
 example #2
average collection period = average accounts receivable
or day sales outstanding x 365 days
total net sales

₱ 600,000
43.8 days = x 365 days
₱ 5,000,000

43.8 days it takes a company to receive the accounts

receivable after a sales transaction on credit
 example #3
cost of goods sold
inventory turnover ratio =
average inventory
year 1 year 2
₱ 200,000 ₱ 600,000
2.86 times = 7.06 times =
₱ 70,000 ₱ 85,000

Year 2 sells its inventory 7.06x over a period of one year compared to Year 1's
2.86x.

It implies that Year 2 can more efficiently sell the inventory it buys. It may show
that Year 2 is not overspending on inventory purchases and is not incurring high
storage and holding costs compared to Year 1.
components of working capital
Management

Reporter: Barcela, Angelyn

Cash
The core of working capital management is
tracking cash and cash needs. This involves
managing the company's cash flow by forecasting
needs, monitoring cash balances, and optimizing
cash flows (inflows and outflows) to ensure that
the company has enough cash to meet its
obligations.
 Account
receivables
A primary component of working capital that can
make up a large portion of current assets.

Accounts receivables are balances that debtors have

to pay to the company. The amount becomes due
when goods or services are delivered to a customer,
but haven’t yet been paid for.

Example: AR turnover ratio.

Net sale credit P200,000
Average AR P250,000
200,000/250,000=0.8/80%
 Accounts
payable
Accounts payable is the amount that a company must
pay out over the short term and is a key component of Formula AP turnover ratio:
working capital management. credit purchase/ Average AP
Companies may delay payments as long as is
reasonably possible with the goal of maintaining
positive credit ratings while sustaining good
relationships with suppliers and creditors.

Sample problem
given
total credit purchase for the yr P1,000,000
beg. Account payables P100,000
End. Account payables P150,000
 INVENTORY
Inventory is a company's primary asset that it
Inventory turnover ratio formula:
converts into sales revenues. Companies primarily
Cost of goods sold/Average Inventory
consider inventory during working capital
management as it may be the most risky aspect of
Given
managing capital. When inventory is sold, a company
ABC company has the following information:
must go to the market and rely on consumer
Cost of Goods Sold (COGS): P1,000,000
preferences to convert inventory to cash.
Beginning Inventory: P200,000
Ending Inventory: P300,000
APPROPRIATE level of
working capital

Reporter: Maigue, Jazmin

 APPRORIATE LEVEL OF WORKING CAPITAL
50% 50%

Refers to adequacy thereof to enable a business entity

to operate efficiently towards the attainment of its
predetermined objectives considering the cost of
money involved.
Factors Affecting the Level of
Working Capital
Inadequate level of Working Capital
Contributes to:
Business failures because of inability to
promptly pursue company objectives
Inability to take advantage of business
opportunities
Inability to avail of cash discounts
Higher product and service costs
Reduced sales volume
Loss of customers
Too Much Working Capital
May result in:
Inefficient use thereof because it encourages
speculation and unnecessary expansion.

Complacency among management people in

as much as they are not under pressure to
carefully plan its allocation and follow-up on
its actual usage and flow.
Adequate Working Capital

Enables a company to pursue its objectives

promptly
Take advantage of business opportunities
Meet its obligations
Conduct operations smoothly
 importance of
working capital management

Reporter: Maigue, Jazmin

Importance of Working Capital Management

It is the lifeblood of
an organization.
Importance of Working Capital Management

The overall profitability and liquidity risk of the

firm is affected by the total amounts, as well as
the types of working capital utilized.

Increased business value

Thank YOu