UNIVERSITY OF MAKATI

J. P. Rizal Ext., West Rembo, Makati City

COLLEGE OF BUSINESS AND FINANCIAL SCIENCE
Department of FINANCE MANAGEMENT
Course Title Title
Module
8
No. FINANCIAL MANAGEMENT 2

FINMAN 2 Module Leader PROF. RENNIEL B. HALLERA

Module
none
Contributors
Time Frame:
You are expected to finish all the activities, assignments, and
assessments of this 9th week of the semester.

How to Complete this .

module? 1. Complete the reading assignment
2. View the shared educational video/reading materials about the course.
3. Participate in this week’s discussion (if any)
4. Complete the Module 1 requirement given by the professor
5. Submit other required outputs

Teaching Strategies Use of UMAK-LMS- TBL, Suggested Education video about the subjects ,
Online discussion (GoogleMeet, Zoom, Messenger, Google classroom) Voice-
over PowerPoint, or video-recorded lectures, Online links, and Online quizzes.

INTRODUCTION

Working capital is part of the total assets of the company. Generally, it is the difference between
current assets and current liabilities. Practically speaking, it is the daily, weekly and monthly
cash requirement for the operations of a business. Therefore, working capital management is
INTRODUCTION

a process of managing short-term assets and liabilities. It makes sure that a firm has sufficient
liquidity to run its operations smoothly.

The efficiency of working capital management can be measured through a variety of methods and ratios.
Financial analysts typically compare the working capital cycle and other working capital ratios against
industry benchmarks or a company`s peers.
LEARNING OUTCOMES

By the end of this module , you should be able to

1. Knowledge: Definition and Importance of Working capital in the business

2.
3. Skills: Assess the best practices on how to manage working capital in business
sustainability

4. Attitude: The learner will have a team collaborate in analysis of working capitalenvironment
as the learners will equipped in the best practices and norms of the organization.

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 WORKING CAPITAL MANAGEMENT

Working capital management is a business strategy designed to ensure that a company

operates efficiently by monitoring and using its current assets and liabilities to the best effect.

 Working capital management requires monitoring a company's assets and liabilities to

maintain sufficient cash flow to meet its short-term operating costs and short-term debt
obligations.
 Working capital management involves tracking three ratios namely the working capital
ratio, the collection ratio, and the inventory ratio.
 Working capital management can improve a company's earnings and profitability through
efficient use of its resources.

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. A
company's working capital is made up of its current assets minus its current liabilities.

Current assets include anything that can be easily converted into cash within 12 months. These
are the company's highly liquid assets. Some current assets include cash, accounts receivable,
inventory, and short-term investments. Current liabilities are any obligations due within the
following 12 months. These include operating expenses and long-term debt payments.
CONTENT

Working capital management commonly involves monitoring cash flow, current assets, and
current liabilities through ratio analysis of the key elements of operating expenses, including the
working capital ratio, collection ratio, and inventory turnover ratio.

Working capital is a vital part of a business and can provide the following advantages to a
business. The most commonly used ratios and measures are the current ratios, days of sales
outstanding, days of inventory outstanding and days of payables outstanding.

Liquidity is often tight in small businesses. It’s because of the reason that the scale of their
operations and investment in WC is a drag on liquidity. The majority of small businesses are
not able to fund the operating cycle with account payables. And due to which they have to rely
on the cash generated internally. Or, in some cases, a cash injection is from their owner.
Efficient working capital management will, therefore, allow a business to run efficiently and
potentially free up some cash. This could be used to pay down debt or invest in a profitable
project.

One of the strongest indicators as to the health of a company is its access to working capital
and how it manages said capital. The best way to understand how working capital is determined
is to know that it’s the difference between your company’s available assets and its liabilities.
Basically, you’re talking about cash that is currently available to your business, unpaid invoices,

2|Page PROF. RB HALLERA

 and any existing inventory compared to your current accounts payable and money your
business might owe. That seems simple enough, but how do each of these different elements
come together to form the basis of working capital management?

Understanding the Three Keys of Working Capital Management

Before we get too deep into the weeds on working capital management, it’s important that you
have a nuts and bolts understanding of exactly what constitutes working capital. Working capital
management traditionally consists of three key features. Each of these components is equally
important in determining the financial health of your business.

 Accounts Receivable

First, you need to look at your accounts receivable. This is all of the money that is
currently due to your company. Any services or goods you’ve already provided that you
are expecting payment for can be considered as part of your accounts receivable. That
means your accounts receivable also include any outstanding invoices you’ve sent to
clients or customers that they’ve agreed to pay but haven’t gotten around to yet.

What’s most important about your accounts receivable is that they represent incoming
cash flow. Good or services for which you’ve already invoiced can prove to be valuable
collateral against which your company can borrow money to cover any potential cash
flow gaps. While it can seem like cold comfort when your business is trying to keep the
lights on, knowing that you have incoming cash flow on the books can prove a deciding
factor in getting the funding you need.

 Accounts Payable

Once you have established your existing accounts receivable, it’s time to look at your
accounts payable. Your accounts payable are practically the opposite of your accounts
receivable. These are any bills or other monies that your company is required to pay in
the short term. You’ll often see companies seeking to delay accounts payable as long as
they can (within reason) so they can maximize the amount of available positive cash
flow.

A result of this practice can be seen in the forms of what are known as “net” payment
terms — such as net-30, net-60, and so on. While these net terms can be beneficial for
large companies in the short term, they’ve also created a ripple effect throughout all kinds
of industries where small and medium-sized businesses (SMBs) are put in tough
positions where their cash flow is hindered as a result of these terms.

 Assets and Inventory

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 It’s also important to make sure you keep track of every asset belonging to your
company. Any inventory your company currently has on hand is considered a positive
asset. This is assuming that any inventory you have on hand is going to be sold and
converted into capital.

Of course, inventory can be a tightrope for companies to maneuver. How a business

manages its inventory can be a strong indicator of the overall operational efficiency of
your business. It’s crucial that your company has enough inventory on hand to fulfill any
potential orders, but not so much that you have an inordinate amount of working capital
tied up in your inventory.

How your business handles these three vital components is the backbone of what makes
up working capital management. Now that you know what working capital management
is, it’s imperative to understand why it’s so important.

Why Working Capital Management is Important for Your Business

We need to establish why working capital management is much more than business jargon.
Working capital management is essential to the success of your business and how your
business is viewed by others.

The ability to properly manage working capital directly correlates to the growth of your business,
not to mention its overall operational viability. Managing your working capital is about more than
keeping cash on hand and having a financially solvent company. It’s about how you’re using
that money and if you have the business acumen necessary to capitalize on your assets.

Sound working capital management means ensuring that your business maintains an adequate
cash flow on hand. This cash needs to be able to satisfy any and all operating costs for the
short term in addition to any bills or other obligations. That’s on top of using your capital to
maximize profits and continue to grow as a company.

Understanding Your Working Capital Ratio and Where it Needs to Be

Current Ratio

The working capital ratio or current ratio is calculated as current assets divided by current
liabilities. It is a key indicator of a company's financial health as it demonstrates its ability to
meet its short-term financial obligations.

The amount of working capital you have compared to your existing obligations makes up your
working capital ratio. The formula for your working capital ratio is that you take your existing
assets and divide them by any liabilities you might have.

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 This ratio is a key metric in establishing the financial health of your company. A ratio of less
than 1.0 may indicate that your company is unable to meet its short-term debts and might be
dealing with liquidity issues later on. This is also a tell-tale sign of a business experiencing cash
flow gaps.

On the other hand, if your working capital ratio is too high, it might mean you don’t know how to
take advantage of an opportunity. If your working capital ratio is higher than 2.0, it may reflect
that you don’t know how to make the best use of your assets to invest back into the business
and continue to grow your company while increasing revenue.

The working capital ratio to lie tends to fall in between 1.5 and 2.0. This tells people that your
business is financially solvent with plenty of cash on hand, but is still taking proactive steps as
it pursues future growth

Collection Ratio
The collection ratio is a measure of how efficiently a company manages its accounts
receivables. The collection ratio is calculated as the product of the number of days in an
accounting period multiplied by the average amount of outstanding accounts receivables
divided by the total amount of net credit sales during the accounting period.

The collection ratio calculation provides the average number of days it takes a company to
receive payment after a sales transaction on credit. If a company's billing department is effective
at collections attempts and customers pay their bills on time, the collection ratio will be lower.
The lower a company's collection ratio, the more efficient its cash flow.

Inventory Turnover Ratio

The final element of working capital management is inventory management. To operate with
maximum efficiency and maintain a comfortably high level of working capital, a company must
keep sufficient inventory on hand to meet customers' needs while avoiding unnecessary
inventory that ties up working capital.

Companies typically measure how efficiently that balance is maintained by monitoring the
inventory turnover ratio. The inventory turnover ratio, calculated as revenues divided by
inventory cost, reveals how rapidly a company's inventory is being sold and replenished. A
relatively low ratio compared to industry peers indicates inventory levels are excessively high,
while a relatively high ratio may indicate inadequate inventory levels.

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 ASSIGNMENT

1.Business Case analysis about working capital ( How the company maximize and use the working
capital management)
ASSESSMENT

Recitation or Class Participation thru online via Zoom or any instructed by the school
Lecture Analysis
Reaction paper thru Google classroom

Rule: In a self-paced and self-contained online classroom, Rubric is required to guide students how to
perform the task assessments.

Lesson Analysis of reading materials

Critical Analysis ( reaction paper about the reading materials provided) 80%
RUBRICS

Writing Skills (Grammar/Sentence Construction) 20%

With Online discussion/ Face to face class

Note
In the event of online discussion- Presentation skills 30%
Summary (Quizzes and Activities) 20%
Critical Analysis ( Reaction paper about the reading materials provided) 40%
Writing Skills (Grammar /Sentence construction) 10%

https://www.bankofamerica.com/smallbusiness/business-financing/learn/what-is-working-capital/
REFERENCES

https://www.fundthrough.com/blog/working-capital/working-capital-management-what-it-is-and-why-its-
important/

https://www.accountingtools.com/articles/what-are-short-term-sources-of-funds.html

6|Page PROF. RB HALLERA