Working Capital Management

3MBA603C3 – Financial Management

Ramos, Karen Gail R.

 Table of Contents

1. …………………………………………………………………………………………………………………..Introduction

1.2 ………………………………………………………..Factors Affecting the Firm’s Working Capital Policy

2. …………………………………………………………………………….Tracing Cash and Net Working Capital

2.1 …………………………………………………………………………………………………………The Operating cycle

2.2 ……………………………………………………………………………………………..The Cash -Conversion cycle

2.3 ……………………………………………………………………………….How operating cycle can be reduced

3 ……………………………………………………Strategies and alternative strategies in working capital

4 …………………………………………………………………………………………….Learning Insight / Reflection

5 ………………………………………………………………………………………………………………………….References
Body
1. Working Capital Management is utilizing the business's current assets and liabilities for the company's
effective operation. Working Capital aims to manage the company's current assets and liabilities to
prserve a sufficient cash flow and meet short-term goals. It helps manage unplanned and planned
expenses and determines the company's efficiency by preserving liquidity. A proper Working
Management Capital allows the company to operate smoothly and improve its profit. It includes
appropriate management of Liquidity, Accounts Receivable, Accounts Payable, Short term Debt, and
Inventory for routine operations. It assists the management in identifying areas that require attention to
maintain profitability and liquidity.

1.2 There is no optimal working capital policy for all firms. The working capital policy is hard to develop
because not all factors are controllable. Here are some of the most influential factors that impact a
company's working capital. The nature of the business influences the working capital to a large extent.
Working capital requirements differ significantly from manufacturing company retailing and services.
The Operating Cycle period affects the amount of working capital. Cash Flow variation influences
Working capital, with the more significant fluctuations of inflows and outflows of a firm, the greater the
working capital required. The working capital precondition of a company are related to sales, so
the firm's scale of operation influences the working capital. The firms operating at a significant scale
need to maintain more inventory, debtors, etc. They generally require substantial working capital,
whereas firms managing at a small scale require less working capital.

2. Tracing Cash and Net working capital is vital to measure a company’s liquidity and ability to meet
short-term obligations, as well as fund operations of the business. There are two ways to trace the cash
and net working capital: the Operating Cycle and the Cash Conversion Cycle.

2.1 The Operating Cycle refers to the time a company takes to buy goods, sell them and receive cash
from the sale of said goods. An operating cycle can be computed by

2.2The Cash Conversion Cycle is a metric that shows the time a company takes to convert its inventory
investments to cash. A Cash Conversion Cycle is computed by CCC = INVENTORY CONVERSION PERIOD +
AVE. COLLECTION PERIOD –PAYABLES DEFERRAL PERIOD or by

2.3 Operating Cycle can be reduced by Managing the Production management, Purchasing
Management, Marketing Management, Credit and Collection Policies and External Environment.
3.ALTERNATIVE POLICIES FOR INVESTMENT SIZE OF CURRENT ASSETS

Relaxed Policy: The estimation of Current assets is achieved by carefully considering the risks, such as a
change in the number of sales, variances in operations, etc.; this considers contingencies and provisions
for any unforeseen event.
Restricted Policy: This is the complete opposite of the relaxed policy.
The estimation is performed by not considering any contingencies and provisions for any unforeseen
event.
Moderate Policy: This policy encompasses both the characteristics of relaxed and restricted policies.
Short term financing-Lower interest cost = Higher profitability
Long-term financing- Higher interest cost = Lower profitability
Conservative financing- Low risk and profitability
Aggressive financing-High risk and profitability

4. Learning Insight

There is no optimal working capital policy for all firms; operating capital policy is hard to develop
because not all factors are controllable, and firms' operations, sizes, and risk appetites differ. Through
this discussion, we learned the importance of having good working capital management to run the
business. We also learned how to identify issues that may prolong a company's process that would
affect its operations and how to deal with them and preserve its liquidity effectively. With Working
Capital management, the firm can manage the company's current assets and liabilities to safeguard a
sufficient cash flow to meet its short-term goals. It also helps manage unplanned and planned expenses
and determines the company's productivity by preserving liquidity. A firm's working capital must be
carefully planned because even though it focuses more on short-term goals, the company's longevity or
life depends on these short-term goals. For example, in a company's operation, there is unnecessary
approval needed n finalizing the sales; this will prolong the cash conversion of this inventory, so the
company must assess which consents were necessary and create policies in approving so that it will
shorten the time of conversion.

4.1 Reflection

Working capital management is one of the most critical in a firm's activity. A lot may differ from one firm
to another, but what always matters is that we always choose the optimal policies and operation flow to
meet the operating expense demand of the firm or maintain its liquidity. Firms must also asses their
current operation flow to see how they can improve or shorten the operation flow without sacrificing
the quality of products or works we produce. Assessing the operation flow also helps us know the
business more so that in the future, if we encounter challenges, we would know how to approach them,
or this may be an instrument to improve the firm's current system.
5.References
Cabrera, Elenita.(2015).Financial management by Elenita Cabrera 2013-2015
Capital Management from https://softco.com/glossary/working-capital-
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%20operational%20effectiveness.

What is working Capital management from https://www.bajajfinserv.in/what-is-working-capital-

management

Samiksha, S. from https://www.yourarticlelibrary.com/management/top-13-factors-affecting-the-

working-capital-of-a-company/8742

Banerjee,P. (2022). https://www.tutorialspoint.com/what-are-the-factors-affecting-a-company-s-

working-capital

Bulaki, S. https:// What is Working efinancemanagement.com/working-capital-

financing/working-capital-management-strategies-approaches