Ortega, Cyrell Apple C.

Sagaya, Ruby Mae M.

Rosillo, Gil Kristopher C.
FINAMA2 MWF (4:00-5:00 pm)

Satello Motor Corporation

Manufacturing Firm

The company primarily operates on its automotive segment which includes the design, manufacture,
assembly and sale of passenger vehicles, minivans and commercial vehicles, such as trucks and re-
lated parts and accessories.

Introduction

Working capital is near the top of the list among business challenges currently faced by manufacturing
companies. The only issue ranked as a more serious concern — escalating costs — is also directly
related to working capital and cash flow. One accounting description of working capital is expressed as
a financial formula in which net working capital equals current assets minus current liabilities. When
this calculation produces a negative number, a business has negative working capital and should be
alert for near-term cash flow problems. Working capital management by manufacturers and other
businesses is designed to anticipate and resolve such difficulties before they cause normal payments
to be delayed.

Working Capital Management

Working capital is a measurement used to describe the difference between current assets
and current liabilities, in other words assets that are expected to turn into cash in the near
future versus liabilities that require prompt cash payment. The quality of working capital is determined
by the nature of the assets and the length of time required turning those assets into cash. Positive
working capital is necessary for a firm in order to be able to continue its daily operations in terms of
sufficient funds to satisfy short-term debts and upcoming operational expenses.

The main goal of WCM is to reach and keep an optimized balance between each component of work-
ing capital. Business success heavily depends on the ability of executives to effectively manage re-
ceivables, inventory and payables. Firms can reduce their financing costs and/or increase the firms
funds available for expansion projects by minimizing the amount of investment tied up in current as-
sets. Most financial manager’s time and effort are allocated in bringing non optimal levels of current
assets and liabilities back towards optimal levels.

Working capital management plays a significant role in determining success or failure of firm in busi-
ness performance due to its effect on firm’s profitability as well on liquidity. Business success depends
heavily on the ability of financial managers to effectively manage the components of working capital. A
firm may adopt an aggressive or a conservative working capital management policy to achieve this
goal.
Role of Working Capital Management in our Company:

Working Capital (Operating Aspect)

Working Capital Requirements is simply calculated by adding the Receivables and Inventory
and subtracting the Payables. If it is in surplus, it means that the dealership company has a
sound liquidity position to meet the Short-term requirements of the business.

The main focus of working capital management to our firm is as follows:

• The organization of investment of current assets.
• How should the current assets be finance

However, the consideration of investment in current assets should avoid two danger levels:

• Excessive investment in current assets.

• Inadequate investment in current assets.

Excessive investment in current assets should be avoided because it impairs the firms
profitability, as idle investment earns nothing. On the other hand, inadequate amount of working capi-
tal can threaten solvency of the firm.

A typical manufacturing will able to invest its current asset adequately and effectively. Useful and unbi-
ased recommendations are set out below:

• Buying of raw material: How much investing to order it should be substantial enough for
production requirements.
• Manufacturing the product: What choice of product technology, management strategy
applies have with vivid relationship with subordinates to carry out effective control.

• Collection of Cash. How to collect either by the short term, or long-term borrowing,
suitably, short-term finance. How there are measures improve working capital
management in organizations.
• There should be recruitment of professional and competent quality personnel into the
account department.
• There should be adequate incentive for staff in cash kind. Provision of favorable working
conditions, payment of salaries and allowances regularly to boost their morale.
• There should be proper organization of cash and stock to avoid the problem of half
hazard transactions.
• There should be segregation of division of labour among staff in the department to avoid
conspiracy by staff to defraud the firm.

Effect of Excessive and Inadequate Working Capital

Since an organization should maintain a sound working capital, should have an adequate
working capital to run its operation. Excessive working capital means holding cost and idle
funds, which earn no profit for the firm. The dangers of excessive working capital are as follows:
• It results in unnecessary accumulation of inventories. Thus the waste theft and losses
increases.
• It is an indication of defective credit policy and slack collection period consequently,
high incidence of bad debts which adversely affects profits.
Inadequate working capital is also bad arid can lead to the followings:
• It stagnates growth
• It becomes difficult for the firm to undertakes profitable projects for non-availability of
working capital funds.
• It becomes difficult to implement operating plans and achieve the firm‟s profit target.
• Operating inefficiencies creep in when it becomes difficult even to meet day-to-day
commitments.
• Fixed assets are not efficiently utilized for the lark of working capital funds. Thus, the
firms profitability deteriorates

Aspects Used in Managing Working Capital

The financial manager must determine levels and composition of current assets. He must ensure right
sources of finances are sourced to finance current assets. There are many aspects of working capital
management, which makes it an important function of the financial manager.

Some of the aspects are:

Time: Working Capital Management requires much of the financial mangers time.
Investment: Working Capital requires a large portion of the total investment in assets.
Criticality: Working Capital Management has great significance on all firms but it is very critical
for small firms.
Growth: The need for working capital is directly related to the firms growth.
Investment in current assets represents a very significant portion total investment in
assets. Working capital management is critical for all firms, particularly for small firms. A small
firm may not have much investment hi fixed assets, but it has to L in current assets.

There is a direct relationship between a firm‟s growth and its capital needs. As sales
grow, the firm growth needs to invest more in inventories and debtors. These needs become
very frequent and fast when sales grow continuously.

In conclusion, precaution should be taken for the effective and efficient management of
working capital. The finance manager should pay particular attention to the levels of current
assets and financing of current assets. To decide the levels and financing of current asset, the
risk return implication must also be evaluated.
Cash Conversion Cycle

To achieve positive cash conversion cycle, the firm must use negotiated liabilities (such as bank loans)
to support its operating assets.

Negotiated liabilities carry an explicit cost, so the firm benefits by minimizing their use in supporting
operating assets. Simply stated, the goal is to minimize the length of the cash conversion cycle, which
minimizes negotiated liabilities. This goal can be realized through use of the following strategies:

1. Turn over inventory as quickly as possible without stockouts that result in lost sales.
2. Collect accounts receivable as quickly as possible without losing sales from high-pressure collec-
tion techniques.
3. Manage mail, processing, and clearing time to reduce them when collecting from customers and to
increase them when paying suppliers.
4. Pay accounts payable as slowly as possible without damaging the firm’s credit rating.

Inventory Management

Inventories have been described as the lifewire of any manufacturing organization. Inventories repre-
sent investment designed to assist in production activities and/or serve customers, without any doubt,
inadequate supply of inventories may grind manufacturing operations into a halt. The mode of control
and management of inventories can be a crucial factor in the success or failure of any manufacturing
concern. For example, insufficient inventory can seriously disrupt the production-distribution cycle that
is so crucial to the survival of all manufacturing organizations. On the other hand, excessive inventory
can cripple a firm’s cash flow and thus endanger its liquidity position. Either way, poor inventory man-
agement can present a serious challenge to the productive capacity of a manufacturing organization.
Therefore, a major goal of most manufacturing firms today is to reduce inventory.

Inventory management has to keep accurate records of goods. It is important for keeping cost
down. The better inventory management will surely help in solving problems the company would be
facing with respect to inventory and will help in reducing huge investment or blocking of money in in-
ventory. Through this study we concluded that companies can follow economic order quantity for opti-
mum purchase and can maintain safety stock for components in order to avoid stock out conditions
and helps in continuous production flow. This will reduce the cost and will increase the profit. There
should be tight control over stocks based upon ABC analysis. If we could properly execute and follow
the all the techniques of inventory management, we will be able to enhance the profit with minimum
cost.

Accounts Receivable Management

There are few options to reduce the cash gap. You can cut back on inventory in your warehouse, but
doing so may lead to shortages and eliminate bulk discounts. You can delay paying suppliers at the
risk of losing early-bird discounts and receiving less favorable credit terms.

So speeding up collections is often the most effective and simplest way to lower the cash gap. Five
ways to encourage customers to pay invoices include:
1. Performing credit checks on prospective customers,
2. Flagging new customers to ensure initial invoices are paid on time,
3. Sending out past-due reminder letters or email messages and following up with phone calls,
4. Offering “early-bird” discounts to customers that pay within 10 or 20 days, and
5. Hiring dedicated, experienced collection personnel.

Manufacturers also should evaluate invoicing procedures to minimize the days in receivables. Poor
communication among billing, sales and production staff can cause invoicing delays.

Popular Collection Techniques

1. Letters
After a certain number of days, the firm sends a polite letter reminding the customer of the overdue
account. If the account is not paid within a certain period after this letter has been sent, a second,
more demanding letter is sent.

2. Telephone calls
If letters prove unsuccessful, a telephone call may be made to the customer to request immediate
payment. If the customer has a reasonable excuse, arrangements may be made to extend the pay-
ment period. A call from the seller’s attorney may be used.

3. Personal visits
This technique is much more common at the consumer credit level, but it may also be effectively
employed by industrial suppliers. Sending a local salesperson or a collection person to confront the
customer can be very effective. Payment may be made on the spot.

4. Collection agencies
A firm can turn uncollectible accounts over to a collection agency or an attorney for collection. The
fees for this service are typically quite high; the firm may receive less than 50 cents on the dollar from
accounts collected in this way.

5. Legal action
Legal action is the most stringent step, an alternative to the use of a collection agency. Not only is
direct legal action expensive, but it may force the debtor into bankruptcy without guaranteeing the
ultimate receipt of the overdue amount.
aThe techniques are listed in the order in which they are typically followed in the collection process.

Management of Receipts and Disbursement

Float occurs in both the average collection period and the average payment period.
One technique for speeding up collections is a lockbox system. A popular technique
for slowing payments is controlled disbursing.