What is Working Capital?
Refers to that part of the capital of
the company which is continually
circulating. It is circulating in the
sense that the initial funds of the firm
are converted into inventories which
in turn are converted into cash or
account receivables and ultimately
into cash again.
Working Capital maybe described
in two ways:
1. Gross Working Capital – the
total amount of the firms
current assets
2. Working Capital - which is the
total amount of current assets
minus current liabilities.
The Gross Working Capital by the
firm is composed by the following:
1.Cash in the firm’s safe
2.Checks to be cashed
3.Balances in the bank account
4.Marketable securities(not
including stocks in subsidiaries)
5.Notes and accounts receivable
6.Supplies
7.Inventories
8.Prepaid expenses
9.Deferred items
Purpose of Working Capital:
1. Replenishment of Inventory
2. Provision for Operating
Expenses
3. Support for Credit Sales
4.Provision of a Safety Margin
REQUIREMENTS IN WORKING
CAPITAL:
1. CASH REQUIREMENTS
The firm needs cash for
expenditures that arise from time
to time. It is necessary to maintain
a sufficient cash fund for the firm
to meet its cash commitments.
2. ACCOUNTS RECEIVABLES
REQUIREMENTS
Firms refer cash sales over credit
sales;
The unpaid portion of credit sales
is represented by accounts
receivable in the firms records.
The collection of account
receivable from customers
contribute to cash inflow
requirements of the firm.
3. INVENTORY
REQUIREMENTS
The production of large stocks of
inventory generate savings as a result of
lower production cost.
The ideal set up is for the firm to make
sales as soon as finished products come
out of the production line, or to acquire
raw materials and supplies as soon as
they are needed.
MANAGEMENT OF WORKING
CAPITAL
WORKING CAPITAL MUST BE:
1. ADEQUATE
2. LIQUID
3. CONSERVED
4. USED IN THE ATTAINMENT OF
PROFIT OBJECTIVES
LIQUIDITY MANAGEMENT
- Liquidity refers to the ability of
the firm to pay its bills on time.
- Achieving the liquidity objectives
of the firm is called liquidity
management.
CASH INFLOW SOURCES
1. Cash Sales
2. Collection of Accounts
Receivables
3. Loans
 4. Sales of Asset
5. Ownership Contribution
6. Advances from Customers
CASH MANAGEMENT
- Idle cash earns nothing and even
if its kept in a bank, the interest it
earns is minimal.
- Sufficient amounts of profits must
be attained, cash should be
invested . Sufficient cash must be
maintained, however, to cover the
firm’s cash expenditures.
FIVE MAJOR APPROACHES IN
CASH MANAGEMENT
1. EXPLOIT TECHNIQUES OF
MONEY MOBILIZATION TO
REDUCE OPERATING
REQUIREMENTS FOR CASH;
2. EXPEND MAJOR EFFORTS TO
INCREASE THE PRECISION AND
RELIABILITY OF CASH FLOW
FORECASTING;
3. USE MAXIMUM EFFORTS TO
DEFINE AND QUANTIFY THE
LIQUIDITY RESERVE NEEDS OF
THE FIRM;
4. DEVELOP EXPLICIT
ALTERNATIVE SOURCES OF
LIQUIDITY
5. SEARCH AGGRESIVELY FOR
MORE PRODUCTIVE USES OF
SURPLUS MONEY ASSETS
MONEY MOBILIZATION
some companies maintain
branches and agencies in distant
places.
IMPROVED CASH FLOW
FORECASTING
a cash flow forecast with high
degree of precision and reliability
provides the firm with realistic
approaches to planning and
budgeting.
Advantages brought by an
improved cash flow forecast:
1. Surplus funds are more fully
invested
2. Alternatives of meeting the
outflows can be explored
3. The creation of special reserves
for major future outlays will be
maximized.
Defining and quantifying the liquidity
reserve needs of the firm.
 Several steps are necessary to
accomplish this objectives:
1. Identification of contingencies
2. Assessment of the probabilities of
the contingencies occurring
3. Assessment of the probabilities of
the contingencies occurring at the
same time
4. Assessment of the probable
amount of cash
SEARCH FOR MORE PRODUCTIVE USES
OF CASH SURPLUS
1. Cash surplus utilized by the firm to
earn a higher returns.
2. Planning activities must also be geared
ACCOUNTS RECEIVABLE MANAGEMENT
- As sales on account cannot be avoided
- This is important because when
accounts receivables are not properly
managed, the financial viability of the firm
may be impaired.
OBJECTIVES:
 Business finance is to maximize
profitability
 credit extension to clients is to
maximize sales
 accounts receivable management
is to determine the cost and
profitability of credit sales.
  projection of cash flow receivables THREE KEY ELEMENTS:

ELEMENTS OF THE COST OF CREDIT  Customer service

1. BAD DEBT COST  Inventory investment(in terms of
pesos or dollars)
2. COST INVESTED FUNDS
 Profit
3. ADMINISTRATIVE FUNDS
FUNCTIONS OF INVESTMENT:
FUNCTIONS OF THE CREDIT
DEPARTMENT:  They serve to offset error
 They often permit to economical
1. Gathering and organizing of utilization
information  It permits the company to
purchase
2. Assuring that efforts are made to
collect receivables FORMS OF INVENTORY:
3. Determining and carrying out 1. Raw Materials
appropriate efforts to collect 2. Work-In-Progress
accounts. 3. Finished Goods

SOURCES OF CREDIT INFORMATION:

METHODS OF ACHIEVING INVENTORY
 PERSONAL INTERVIEWS GOALS:
 REFERENCES
 ABC method
 CREDIT BUREAUS
 Economic order quantity method
 CREDIT-REPORTING AGENCIES Safety
 BANKS  Anticipation stock
SERVICES RENDERED BY CREDIT BUREAUS:

 REPORTS
 BULLETINS
 CREDIT GUIDES
 SPECIAL SERVICES

EVALUATION OF CREDIT RISK:

 CAPITAL
 CAPACITY
 CHARACTER
 CONDITIONS
INVENTORY MANAGEMENT
- refers to the activity that track of how
many of the procured items rendered to
create a product or service
- liquidity and profitability