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Working Capital Management

This document discusses working capital management. It defines working capital as the current assets like cash, receivables, inventory that are used to finance daily operations. It discusses the importance of managing working capital and identifies types like cash, receivables, inventory. It covers the objectives of cash management, accounts receivable management and inventory management which include maintaining adequate liquidity and utilizing current assets efficiently.

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LeUqar Bico-Enriquez Gabia
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76 views28 pages

Working Capital Management

This document discusses working capital management. It defines working capital as the current assets like cash, receivables, inventory that are used to finance daily operations. It discusses the importance of managing working capital and identifies types like cash, receivables, inventory. It covers the objectives of cash management, accounts receivable management and inventory management which include maintaining adequate liquidity and utilizing current assets efficiently.

Uploaded by

LeUqar Bico-Enriquez Gabia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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WORKING

CAPITAL
MANAGEMENT

RAQUEL E. GABIA
Presenter
Objectives
To define Working Capital
To understand the importance of managing
properly the firm’s working capital.
To identify the types of working capital and
how do they differ with one another.
To know the functions of cash
management, accounts receivable
management, and inventory management.
What is Capital?
Working capital basically means the
available current or short-term assets of a
firm such as cash, receivables, inventory
and marketable securities that are used to
finance its day-to-day operations.
These items are also referred to as
“circulating capital”.
 Working capital basically means the
available current or short-term assets of
a firm such as cash, receivables,
inventory and marketable securities
that are used to finance its day-to-day
operations.
These items are also referred to as
“circulating capital”.
Composition of Gross
Working Capital
Cash in the firm’s Safe;
Checks to be Cashed;
Balances in the bank accounts;
Marketable securities (not including the stocks in
subsidiaries);
Notes and accounts receivable;
Supplies;
Inventories; and
Prepaid expenses.
Cash Requirements
The amount of cash needed of the firm’s
purchases and cash sales;
The time period for which the firms
received\s and grants credit;
The time period from the dates of purchase
of raw materials and payment of wages to
the dates of cash receipts from sales.
The amount of cash to be used for
investment of inventories.
Decisions relating to working capital and
short term financing are referred to as working
capital management. Short term financial
management is concerned with decisions
regarding to CA and CL.

Management of Working Capital refers to


management of Current Assets as well as
Current Liabilities.
An increase in working capital indicates that the
business has either increased current assets (that is
received cash, or other current assets) or has
decreased current liabilities, for example has paid
off some short-term creditors.
The fundamental principles of working capital
management are reducing the capital employed and
improving efficiency in the areas of receivables,
inventories, and payables.
The goal of working capital management is to ensure that the
firm is able to continue its operations and that it has sufficient
cash flow to satisfy both maturing short-term debt and
upcoming operational expenses.
Businesses face ever increasing pressure on costs and
financing requirements as a result of intensified competition
on globalized markets. When trying to attain greater
efficiency, it is important not to focus exclusively on income
and expense items, but to also take into account the capital
structure, whose improvement can free up valuable financial
resources
Working Capital
Management
Working capital must be adequate to cover
all current financial requirements.
The working capital structure must be liquid
enough to meet current obligations as they fall
due.
Working capital must be conserved through
proper allocation and economical use.
Working capital must be used in the
attainment of the profit objectives of the
form.
The Need for Working
Capital
Corporate executives devote a considerable amount of
attention to the management of working capital.
Positive working capital is required to ensure that a
firm is able to continue its operations and that it has
sufficient funds to satisfy both maturing short-term
debt and upcoming operational expenses.
Replenishment of Inventory
Provision for Operation Expenses
Support for Credit Sales
Provision of Safety Margins
The Need for Working
Capital
As profits earned depend upon
magnitude of sales and they do not
convert into cash instantly, thus there
is a need for working capital in the
form of CA so as to deal with the
problem arising from lack of
immediate realization of cash against
goods sold.
The Need for Working
Capital

Operating Cycle
Liquidity Management
Liquidity refers to the ability of
the firm to pay its bills on time or
otherwise meet its current
obligations. The activities geared
towards achieving the liquidity
objectives of the firm is called
Liquidity Management.
Sources of Cash Inflows
1. Cash Sales
2. Collection of Accounts Receivables
3. Loans
4. Sales of Assets
5. Ownership Contribution
6. Advances from Customers
Cash Management
Idle cash earns nothing and even if it is kept
in a bank, the interest it earns is minimal. If
sufficient amounts of profits must be
attained, cash should be invested. Sufficient
cash must be maintained, however, to cover
the firm’s cash expenditures. The activity
involved in achieving these two opposite
goals is called Cash Management.
Accounts Receivable Management
The objective of accounts receivable
management is to determine the cost and
profitability of credit sales. Here is no point of
extending credit to customers if this will cause
a lowering of the firm’s return on investment.
Projection of cash flows from receivables.
Relates to the direction of and control of
activities involved in the extension of credit to
customers.
Accounts Receivable Management

ELEMENTS OF THE COST OF CREDIT:

1. Bad Debts
- Uncollected
2. Cost of Invested Funds
- Rate at which the firm could borrow funds
to finance credit sales
3. Administrative Costs
Functions of the Credit Department
1. Gathering and organizing of information
necessary for decisions on the ranting of
credit to particular customers.
2. Assuring that the effort are made to collect
receivables when they become due.
3. Determining and carrying out appropriate
efforts to collect accounts of customers
who cannot or do not intend to pay.
Sources of Credit Information

1. Personal Interviews
2. References
3. Credit Bureaus
4. Credit Reporting Agencies
5. Banks
Information Needed
1. The name of the applicant
2. Residence and former address
3. Occupation or business
4. Business address
5. Bank where the applicant maintains an
account
6. Property owned
Evaluation of Credit Risk
1. Capital
2. Capacity
3. Character
4. Conditions
Inventory Management
the activity that keeps track of
how many of the procured
items needed to create a
product or service are on hand,
where each item is, and who has
the responsibility for each item.
Functions of Inventory
1. They serve to offset errors contained in the
forecast of the demand for the company’s
products.
2. They often permit more economical utilization of
equipment, buildings, and manpower when the
nature of the business is such that fluctuations in
demand exists.
3. It permits the company to purchase or
manufacture in economic lot sizes.
Forms of Inventory
1. Raw Materials
2. Work-in-Process
3. Finished Goods
Methods in Achieving Inventory
Goals

1. The ABC Method


2. The Economic Order Quantity
Method
3. The Safety Stock
4. The Anticipation Stock
Tha

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