Subject: Business Finance

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WEEK 4
LESSON 3- WORKING CAPITAL AND CASH FLOW MANAGEMENT

Description of the Lesson:

In this lesson we will be discussing about the life blood of a business also known as the working
capital. Correspondingly, we will also tackle about process of tracking how much money is coming
into and out of your business so-called cash flow management.

Objectives:

At the end of the lesson, you are expected to:

a. define Working Capital;
b. understand the concept of cash flow management; and
c. understand the concept of Break-Even Analysis and Time Value of Money in relation to profitability
and taking risks in business decision making.
Day 1: Pre-assessment (What I know)

Direction: Identify whether the following accounts is Current Asset (CA) or Current Liability (CL).
Date Accomplished: ____________________________
1. Cash on hand_____
2. Cash in bank_____
3. Inventories _____
4. Pre-paid Expenses_____
5. Bills Receivables_____

Lesson Content (What’s New)

How was activity above? I hope you enjoyed answering it. Before we proceed with our lesson, I want
you to ask yourself the following questions.
1. How much should a company invest in current assets?
2. How should a company finance such investment?

A. Working Capital Management

Working capital management or short-term financial management refers to that part of the
firm’s capital, which is required for financing short-term or current assets such a cash marketable
securities, debtors and - inventories. Funds thus, invested in current assets keep revolving fast and are
constantly converted into cash and this cash flow out again in exchange for other current assets.
Working Capital is also known as revolving or circulating capital. Remember, it generally deals with
managerial decisions regarding current assets and how they are financed.

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 Current assets include inventory, accounts receivable, marketable securities, and cash.
Current liabilities include notes payable, accruals, and accounts payable.
The following conditions should be attained:
1. Cash – should be enough to support firm’s operations.
2. Accounts Receivable – ought to not be too slack nor too strict in allowing credits.
3. Inventories – ought to be sufficient to support market demand
4. Current Liabilities – to be cautious in utilizing the time before it finally pays off its
obligations.

Working Capital is analyzed as the ability to meet current obligations as they come due
using current ratio analysis. However, the use of current ratio must be made with care and
caution. A good current ratio may only imply liquidity position, but this may not be absolutely
true. Careful and deeper analysis on the composition of the current assets must be made.
Example would be the inclusion of old accounts receivable and non-moving inventories.
Effective management of working capital will improve the firm’s overall return on
investment performance. Usually, the firm’s goal is to minimize net working capital. This could
be achieved by:
1. Having faster collection of cash from sales or service revenues,
2. Increasing inventory turnover,
3. Slowing down disbursements to suppliers or securing longer credit terms.

Practice (What is it)

Instruction: In your thoughts, draw a diagram that illustrates the concept of Working Capital. Create
your drawing on the answer sheet provided. (10 pts)

Day 2: Let’s Keep on Learning!

A. Advantages of Adequate Working Capital

a. Solvency of the business. It helps in maintaining solvency of the business by providing

uninterrupted flow of production.
b. Goodwill. Sufficient working capital helps in creating and maintaining goodwill.

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 c. Easy loans. A high solvency and good credit standing can arrange loans from banks and
others on easy and favorable terms.
d. Cash discounts. Enables a concern to avail cash discounts on purchases and hence it
reduces cost.
e. Regular supply of raw material. Sufficient working capital ensure regular supply of
raw materials and continuous production.
f. Regular payment of salaries, wages and other day to day commitments. A company
which has ample working capital can make regular payment of salaries, wages and other
day to day commitments which raises morale of its employees, increases their efficiency,
reduce costs and wastages.
g. Ability to face crisis. Enables a concern to face business crisis in emergencies such as
depression.
h. Quick and regular return on investments. Enables a concern to pay quick and regular
dividends to its investors as there may not be much pressure to plough back profits which
gains the confidence of investors and creates a favorable market to raise additional funds
in future.
i. Exploitation of favorable market conditions. Only concerns with adequate working
capital can exploit favorable market conditions such as purchasing its requirements in
bulk when the prices are lower and by holding its inventories at higher prices.
j. High morale. Creates an environment of security, confidence, and high morale and
created overall efficiency in a business.

The management is to ensure that the firm has adequate working capital to run its business
operations smoothly. It should have neither excess working capital nor inadequate working
capital.

Valuing/Integration (What’s More)

Instruction: Answer the True or False activity on your provided answer sheet.
Day 3: Application (What I Can Do)

Instruction: Enumerate the following on your answer sheet provided (15 pts) :
1. 5 Current Assets
2. 5 Current Liabilities
3. 5 Advantages of Adequate Working Capital

Post-Assessment (What I Have Learned)

Instruction: In your observation, given the volatility of the tourism industry in this time of pandemic;
share some practices or strategies that other businesses have done to maximize their working capital to
survive. (10 pts)

Subject:
Teacher:
Student’s Name: ___________________________________________________
Course and Section: ________________________________________________

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 Answer Sheet for Week 2 – The Manufacturing Enterprise

Practice (What is it)

Instruction: In your thoughts, draw a diagram that illustrates the concept of Working Capital. Create
your drawing on the answer sheet provided. (10 pts)

Day 2: Valuing/Integration (What’s More) (15 pts)

Instruction: Write TRUE if the statement is true and FALSE if the statement is false.
______________1. Having an adequate working capital helps in maintaining solvency of the business
by providing uninterrupted flow of production.
______________2. Having an adequate working capital enables a concern to face business crisis in
emergencies such as depression.
______________3. Having faster collection of cash from sales or service revenues is usually the firm’s
goal is to minimize net working capital
______________4. A high solvency and good credit standing can arrange loans from banks and others
on easy and favorable terms.
______________5. To minimize net working capital of the firm is usually by slowing down
disbursements to suppliers or securing longer credit terms.

Day 3: Application (What I Can Do) (15 pts)

1. 5 Current Assets
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 
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2. 5 Current Liabilities
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3. 5 Advantages of Adequate Working Capital
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Post-Assessment (What I Have Learned)

Instruction: In your observation, given the volatility of the tourism industry in this time of pandemic;
share some practices or strategies that other businesses have done to maximize their working capital to
survive. (10 pts)

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REMINDERS:

Things to remember as you accomplish this module:

1. Keep this module and notes inside your portfolio.
2. If there are any questions or BUSINESS
clarifications, kindly send me a message through
FINANCE P a gthe
e5|5
following:
 Call/text –09088143178
 Messenger – RCI Ace San Gabriel