Working Capital

& Cashflow

Management
Prepared by : Group 2 BSTM-1B
WORKING CAPITAL
WORKING CAPITAL
Is calculated by subtracting current liabilities from current assets, as listed on

the company’s balance sheet. Current assets include cash, accounts

1
receivable and inventory. Current liabilities include accounts payable, taxes,

wages and interest owed.

is a financial metric that is the difference between a company’s curent assets

and current liabilities. As a financial metric, working capital helps plan for

Add a main point

future needs and ensure the company has enough cash and cash equivalents

2 Briefly elaborate on what you want to discuss.

meet short-termonobligations,
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to discuss.
as unpaid taxes and short-term debt. If a

company has enough working capital, it can continue to pay its employees

and suppliers and meet other obligations.

can also be used to fund business growth without incurring debt. If the

3 company does need to borrow money, demonstrating positive working capital

can make it easier to qualify for loans or other forms of credit.

WORKING CAPITAL
WORKING CAPITAL FORMULA

Working Capital = Current Assets - Current Liabilities

Example:

A company has $100,000 of current assets and $30,000 of

current liabilities. The company is therefore said to have

$70,000 of working capital. This means the company has

$70,000 at its disposal in the short term if it needs to raise

money for a specific reason.

WORKING CAPITAL

When a working capital calculation is positive,

this means the company's current assets are

greater than its current liabilities.

When a working capital calculation is negative,

this means the company's current assets are

not enough to pay for all of its current liabilities.

COMPONENTS WORKING CAPITAL

All components of working capital can be found a company's balance sheet,

though a company may not have used for all elements of working capital

discussed below. For example, a service company that does not carry

inventory will simply not factor inventory into its working capital calculation.

Current Assets - these assets are economic benefits that the

company expects to receive within the next 12 months.

Current liabilities - are simply all debts a company owes or will

owe within the next twelve months

WORKING CAPITAL
Cash and cash equivalents - All of the money the company has

on hand.

Inventory - All of the unsold goods being stored. This includes

raw materials purchased to manufacture, partially assembled

inventory that is in process and finished goods that have not

yet been sold.

Accounts Receivable - All of the claims to cash for inventory items

sold on credit.

Notes Receivable - all of the claims to cash for other agreements, often

agreed to through a physically signed agreement. Prepaid Expenses: All of the

value for expenses paid in advance.

WORKING CAPITAL
Accounts Payable - All unpaid invoices to vendors for supplies, raw materials,

utilities, property taxes, rent, or any other operating expense owed to an

outside third party.

Wages Payable - All unpaid accrued salaries and wages for staff members.

Current Portion of Long-Term Debt - All short-term payments related to

long-term debt.

Accrued Tax Payable - all obligations to government bodies. These may be

accruals for tax obligations for filings not due for months. However, these

accruals are usually always short-term (due within the next 12 months) in

nature. Dividend Payable: All authorized payments to shareholders that have

authorized.

Unearned Revenue - all capital received in advance of having completed work.

 Why Is Working Capital

Important?

Working capital is important

because it is necessary for
businesses to remain solvent. In
theory, a business could become
bankrupt even if it is profitable.
After all, a business cannot rely
on paper profits to pay its bills—
those bills need to be paid in
cash readily in hand.
 How Can a Company

Improve Its Working

Capital?
A company can improve
its working capital by
increasing its current
assets
FINANCIAL
PLANNING
 DEFINITION
Financial Planning is the process of

estimating the capital required and

determining its competition. It is the

process of framing financial policies in

relation to procurement, investment

and administration of funds of an

enterprise.
 OBJECTIVES
Determining capital requirements- This will depend upon factors like cost

of current and fixed assets, promotional expenses and long- range planning.

Capital requirements have to be looked with both aspects: short- term and
long- term requirements.

Determining capital structure- The capital structure is the composition of

capital, i.e., the relative kind and proportion of capital required in the

business. This includes decisions of debt- equity ratio- both short-term and

long- term.

Framing financial policies with regards to cash control, lending,

borrowings, etc.

A finance manager ensures that the scarce financial resources are

maximally utilized in the best possible manner at least cost in order to get

maximum returns on investment.

 IMPORTANCE
Financial Planning is process of framing

objectives, policies, procedures, programmes and

budgets regarding the financial activities of a

concern. This ensures effective and adequate

financial and investment policies. The importance

can be outlined as:

 1. Adequate funds have to be ensured.

2. Financial Planning helps in ensuring a reasonable balance

between outflow and inflow of funds so that stability is

maintained.

3. Financial Planning ensures that the suppliers of funds are

easily investing in companies which exercise financial

planning.
4. Financial Planning helps in making growth and

expansion programmes which helps in long-run survival of

the company.
1.

5. Financial Planning reduces uncertainties with regards to

changing market trends which can be faced easily through

enough funds.

6. Financial Planning helps in reducing the uncertainties

which can be a hindrance to growth of the company. This

helps in ensuring stability an d profitability in concern.

CASH FLOW
WHAT IS CASHFLOW?
Cash Flow refers to the net balance and of cash

moving into and out of a business at a specific

point in time. It is the net amount of cash and

cash equivalents being transferred in and out of

a company. The Cash received represents

inflows, while money spent represents outflows.

3 TYPES OF

CASH FLOW
 Operating Cash

Flow
·(OCF) is a measure of
the amount of cash
generated by a
company's normal
business operations.
 Investing Cash

Flow
·Cash flows from investing
activities include making
and collecting loans (except
for program loans) and the
acquisition and disposition
of debt or equity
instruments.
 Financing Cash

Flow
·is a form of financing
in which a loan made
to a company is
backed by a
company's expected
cash flows.
 TWO METHODS USED IN

CALCULATING CASH FLOW FROM

OPERATING ACTIVITIES

This method draws data from

the income statement using

cash receipts and cash

DIRECT

disbursements from

METHOD
operating activities. The net

of the two values is the

operating cash flow.

 example
Collection from

Customers ₱900
Deductions:
Payments to suppliers

(₱250)
Wages (₱250)
Net cash from operating
Activities ₱400
This method starts with

net income and converts

it to operating cash flow

INDIRECT

by adjusting for items

that were used to

METHOD
calculate net income but

did not affect cash.

 example
Net Income ₱300
Adjustments:
Depreciation and

Amortization ₱50
Changes in Working

Capital ₱50
Net Cash from operating
Activities ₱400
 The Cash Flow Statement
Cash flow is typically reported in the cash flow

statement, a financial document designed to

provide a detailed analysis of what happened

to a business’s cash during a specified period

of time. The document shows different areas

where a company used or received cash and

reconciles the beginning and ending cash

balances.
ACCOUNTS RECEIVABLE

MANAGEMENT
 ACCOUNTS RECEIVABLE
consists of money owed to a firm for goods and

services sold on credit. This type of credit basically

takes two forms:

1. Trade or
2. Consumer or
Commercial Credit Retail Credit

CR EDI T WH I C H TH E
CR EDI T WH I C H

THE F I RM E XTE N TS

FI R M EXTENDS TO

TO I T S FI NAL

OTH ER FI RMS
CUS TOMERS .
CREDIT WHICH THE FIRM

EXTENTS TO ITS FINAL

CUSTOMERS
- TH E GOAL OF AC C OUN TS

R ECEI VABLE MAN AG E M ENT I S TO

ENS URE THA T TH E FI RM ' S

I NVESTMENT I N AC C OU NTS

R ECEI VABLE I S APPROPRI A TE A ND

CON TRI BUT E S TO S H AR EHO LDER

MAXI MI ZATI ON .
CREDIT POLICY
 Credit policy is a set of guidelines for

extending credit to customers.

It generally covers the

following variables:

1 . CREDI T ST AN D AR D S

2 . CREDI T TER MS

3 . COLLECT I O N PO L I CY
Credit Standards
 CREDIT STANDARD
-REFER TO THE MINIMUM FINANCIAL STRENGTH OF

ACCEPTABLE CREDIT CUSTOMER AND THE AMOUNT

AVAILABLE TO DIFFERENT CUSTOMER.

Setting credit standards implicitly requires a

measurement of credit quality, which is
defined in terms of the probability of a
customer's default. The probability
estimate for a given customer is for the
most part a subjective judgment.
HOW TO MEASURE CREDIT

QUALITY AND CUSTOMER

CREDIT WORTHINESS?
THE FOLLOWING AREAS

ARE GENERALLY

EVALUATED (5 CS)?
 1. CHARACTER
-REFERS TO THE PROBABILITY THAT

THE CUSTOMERS WILL PAY THEIR

DEBTS. THIS INCLUDES BACKGROUND

INFORMATION ON PEOPLE AND FIRMS

PAST PERFORMANCES FROM A FIRMS

BANKERS, THEIR OTHER SUPPLIERS,

THEIR CUSTOMERS, AND EVEN THEIR

COMPETITORS.
 2. CAPACITY
-REFERS TO THE JUDGMENT

OF CUSTOMERS' ABILITIES TO

PAY. IT IS DETERMINED IN

PART BY THE CUSTOMERS

PAST RECORDS AND

BUSINESS METHODS.
 3. CAPITAL
-MEASURED BY THE GENERAL

FINANCIAL CONDITION OF A

FIRM AS INDICATED BY AN

ANALYSIS OF ITS FINANCIAL

STATEMENTS.
 4. COLLATERAL
-REPRESENTED BY ASSETS

THAT CUSTOMERS MAY

OFFER AS SECURITY IN

ORDER TO OBTAIN

CREDIT.
 5. CONDITIONS
-REFER BOTH TO GENERAL

ECONOMIC TRENDS AND TO

SPECIAL DEVELOPMENTS IN

CERTAIN GEOGRAPHIC REGIONS OR

SECTORS OF THE ECONOMY THAT

MIGHT AFFECT CUSTOMERS

ABILITIES TO MEET THEIR

OBLIGATIONS.
CREDIT TERMS
 - C REDIT TERMS INVOL VE BOTH THE L EN GTH OF

THE C REDIT PERIOD A N D THE DI SC OUN T GI VE N.

·Credit period -Length of time buyers are given to pay

for their purchases.

·Discounts-Are price reductions for early payment. Ex.

2/10 n30 means a 2% discount is given fi the bill is paid on

or before the 10th day after the date of invoice; payment

is due by the 30th day. (credit period is 30 days).

The credit period if lengthened generally results to an

increased in product demand and vice versa.

Collection Policy
 COLLECTION POLICY
refers to the procedures the firm

follows to collect pas-due

accounts.

Ex. A letter may be sent to customers when a bill is 10 days past

due; a more severe letter, followed by a telephone call, may be

used if payment is not received within 30 days; and the account

may be turned over to a collection agency after 90 days.

 SHORT

-RUN
OPERATION
Short-run operation is an economic concept that refers

to a period of time in which at least one production

factor is fixed and cannot be changed. These

production factors are usually capital, labor, and raw

materials. This means that the quantity of output

produced is limited by the fixed production factor. As

such, firms will attempt to optimize their production

costs by making the most of the available resources.

Short-run operations can be more cost-efficient than

long-run operations, as firms can capitalize on

economies of scale and other short-term advantages.

Short-Run Operations - Financial

Decisions

For example, a decision to build an automated

factory based on forecasts of cash flow for fifteen

years, in contrast to a decision of investing surplus

cash in a 10-week treasury notes differ in financial

management
 Inventory

Major
Cash and Short-

term Investments
Types
Accounts

Receivables
 LONG-

RUN
OPERATION
Long-run variables for financial

decision making include

elements that are treated in

making shrt-run operating

decisions, plus the capital factors

that are constant or fixed in the

short-run.
Inventory

Cash and Short-

term Investments

Accounts

Receivables
Variable expenses should be controlled as a

percentage of activity. In other words, if sales

double, variable expenses also double, and vice

verasa. Fixed expenses should be controlled as an

amount, not as percentage of sales. They should not

move directly with activity. Just because sales rise or

fall this should not necessarily affect the fixed

expenses. They should remain the same.

BREAK-EVEN
POINT

VARIABLE
Break-even Analysis
A breakeven analysis determines the

sales volume your business needs to

start making a profit, based on your

fixed costs, variable costs, and selling

price. It often is used in conjunction

with a sales forecast when developing a

pricing strategy, either as part of a

marketing plan or a business plan.

Fixed Costs
Fixed costs are expenses that must be

paid whether or not any units are

produced. They are fixed over a

specified period of time or range of

production. Fixed costs are easy to

calculate for existing businesses, but

new businesses must do research to

get the most accurate figures

available.
 Property taxes
Insurance
Vehicle leases (or loan

payments if the vehicle is

Examples
purchased)
Equipment (machinery, tools,

computers, etc.)
Payroll (if employees are on

salary)
Utilities
Accounting fees
Variable Costs
Unit costs vary depending on

the number of products

produced and other factors.

For instance, the cost of the

materials needed and the

labor used to produce units

isn't always the same.

 Wages for commission-based

employees (such as salespeople) or

contractors
Utility usage—electricity, gas, or

water—that increases with activity

Examples Raw materials
Shipping
Advertising (can be fixed or

variable)
Equipment repair
Sales tools such as credit card

processing fees
 How to Calculate

Break-even Point

Breakeven Point in Units =

Fixed Costs
(Price - Variable Costs)
 Sample Computation
Suppose that your fixed costs for producing 30,000 widgets are $30,000 a year.

Your variable costs are $2.20 for materials, $4 for labor, and $0.80 for overhead for

a total of $7.If you choose a selling price of $12.00 for each widget, then:

$30,000/($12-$7)=6,000 units.

This means that selling 6,000 widgets at $12 apiece covers your costs of $30,000.

Each unit sold beyond 6,000 generates $5 worth of profit. A sample breakdown

leading to this calculation might look soething like this:

Break-even Point
A company's breakeven point

is the point at which its sales

exactly cover its expenses. To

compute a company's

breakeven point in sales

volume, you need to know the

values of three variables:

What Happens to the Breakeven

Point If Sales Change?

For example, if the economy is in a recession,

your sales might drop. If sales drop, then you

may risk not selling enough to meet your

breakeven point. In the example of XYZ

Corporation, you might not sell the 50,000

units necessary to break even.

In that case, you would not be able to pay all

your expenses.
 Finding missing expenses. A

breakeven analysis can help uncover

BENEFITS expenses that you otherwise might

not have seen coming. Setting goals. You will know

exactly what kind of goals need to

be met to make a profit after a

Limiting decisions based on

breakeven analysis.
emotions. Making business decisions

based on emotions is rarely a good

idea, but it can be hard to avoid.

Pricing appropriately. A

breakeven analysis will show you

Securing funding. Often, you will

how to properly price your products

need to use a breakeven analysis to

from a business standpoint.
secure funding and show investors

the plan for your business.

FIXED
EXPENSE
DEFINITION
Fixed expenses are those that remain constant within your

budget, though they may change occasionally, for example,

if you switch to a new cellphone service provider or your

landlord raises your rent. Fixed expenses are paid at

regular intervals and may vary slightly, change

significantly or stay the same, depending on the type of

expense. Monthly expenses are common, but fixed expenses

may also occur weekly, quarterly, twice a year and yearly.

Knowing your bills’ intervals can help in budgeting. If you

pay car insurance twice a year, for example, divide the

payment premium by six to get the monthly cost and add

that amount to your monthly budget.

EXAMPLES
Rent or mortgage payments
Car payments
Other loan payments
Insurance premiums
Property taxes
Phone and utility bills
Child care costs
Tuition fees
Gym memberships
TIME

VALUE OF

MONEY
WHAT IS TIME VALUE OF MONEY?
The time value of money is a financial principle that states the value of a dollar

today is worth more than the value of a dollar in the future.

If you're like most people, you would choose to receive the 10,000 now. After

all, three years is a long time to wait. Why would any rational person defer

payment into the future when they could have the same amount of money now?

By receiving $10,000 today, you are poised to increase the future value of your

money by investing and gaining interest over a period of time. For Option B,

you don't have time on your side, and the payment received in three years would

be your future value.

WHAT IS TIME VALUE OF MONEY?
The time value of money is a financial principle that states the value of a dollar

today is worth more than the value of a dollar in the future.

If you're like most people, you would choose to receive the 10,000 now. After

all, three years is a long time to wait. Why would any rational person defer

payment into the future when they could have the same amount of money now?

By receiving $10,000 today, you are poised to increase the future value of your

money by investing and gaining interest over a period of time. For Option B,

you don't have time on your side, and the payment received in three years would

be your future value.

WHY DOES TIME VALUE OF MONEY MATTER?

The time value of money helps decision-makers

select the best option. Time value of money equalizes

options based on timing, as absolute dollar amounts

spanning different time spans should not be valued

equally.
If you are choosing Option A, your future value will be 10,000 plus any interest

acquired over the three years. The future value for Option B, on the other hand,

would only be 10,000. So how can you calculate exactly how much more Option A is

worth, compared to Option B?

Future Value Basics

If you choose Option A and invest the total amount at a simple annual rate of 4.5%,

the future value of your investment at the end of the first year is 10,450. We arrive at

this sum by multiplying the principal amount of 10,000 by the interest rate of 4.5%

and then adding the interest gained to the principal amount:

10,000×0.045= 450
450+10,000= 10,450
Any questions

or

clarifications?
Leader : Nombre, Micaela B.
Members :
Malonzo, Ma. Mizi Michaela B
Add a little bit of body text
Manahan III, Eliseo M.
Mangalile, Nicollete P.
Manuel, John Lorenz T.
Marasigan, Andrilla Mekaila M.
Masong, Laarnie R.
Mendoza, Julius B.
Mina, Gracie Mae G.
Modanza, Jennelyn S.
Thank you!