Long cre labilices Non current ase Moraes payable uipment ‘ockholders eoi6Y ‘p46,000 Total iabliis 2 ero «stockholders equity “The working capital is computed aS Cafrenc sets Cash ‘Accounts receivable 720,000 60,000 84,000 Inventory ‘Current liabilities ‘Accounts payable 724,000 ‘Notes payable ~shor erm 6,000 ‘Accrued expenses payable 10,000 ‘Working capital — Working Capital Management “Working capital management is concerned with the: ‘efficient and effective utilization ‘of working capital vauain the predetermined objectives of the company relative to profitability of operations, liquidity of i ees and minimization ofisks and company costs. [e is also pertinent to the administration HT eonttol of working capital ro ensute that itis adequate ‘and effectively utilized. productive and beneficial to the firm if placed somewhere else (Shim & Siegel, 2006+ goal of management is ‘hus maintaining aleve of cash that is enough to support the firm's fs hazardous to the company. As the most liquid among the ene ge manager nul oll chan occurence bas ofthe ik aed. Ay cash shoal in other investment opportuni like time deposit, mutual funds, bonds, and capital it he company’s eee be anather option to prevent paying for more ice 5; ‘aware that having excess cash dos i r : Bee tS es not contribute ro the firms profil the company does not want > be too lax nor too strict i ivable increases and bad debts. On the othet1 year is a good tool to help 4, Preparing the budget. Doing the budget for the entire y gs help the com aa ee ae required or when ichas an excess working capital. The op Aillalo have a clearer piecure of what acd help improve the firm's performance. foal, Ehrough this budget, the firm can clearly identify the tiga” ‘man: a tes the could nderg® ish: pr "ash Management y S eater me: asset used to purchase raw materials, pay for Labor, buy capital assets, and py dividends taxes and obligations. Alhough cash isthe life support ofthe company. it does no can ty for itself if not managed properly. Mismanagement of cash deprives the firm of the opportunity 49 ‘more, In this sense, the objective of cash management is ro minimize the use of cash and maintain opie ash at the right time. Good cash management knows how much cash is needed in conducting the fs ‘normal business operations while having sufficient cash to mect unexpected needs. Likewise, it ensures da ‘excess funds are placed for investment (Rosset al., 2008). Cash, being the most liquid of all the assets, maa be carefully planned and controlled. Cash management holds on to marketable securities to avoid cash shortages. Firms whose operation i seasonal may opt co buy marketable securities when they have excess funds and sell the same secu times of cash shortage. The investment portfolio should pay attention to return on investment, the sk involved, disposability or marketability, and maturity dates. Cash management is also concerned with the acceleration of cash receipts and suspension of cath disbursements. Reasons for Maintaining Cash _Firms hold on to cash for numerous reasons: performing normal operations, safety reasons, taking advantage of an unforeseen investment activity, and many more (Levy, 1998). Listed below are the most common reasons for maintaining cash. 1. Transaction motive. This refers to the intenti requirement. Thus, cash balance should be enou, obligations to creditors, periodic payroll, supplies, this motive, cash collections must be immediate and disbursements resule in changes in cash requirements. Shortage in cash collections results in borrowings and any excess funds may be invested in marketable securitice, SS 2 SS eeEquivalents Cash equivalents are short-term, eed whine’ Scat thet? ‘A90-day treasury bill A 180-day treasury bill purchased within 90 d. i i ‘90-day time deposit eee ey ‘A 90-day commercial paper Long-term commercial paper purchased within 90 days befor ; ys before i it (Other money market instruments whose maturity is within three months, 1, Taking advantage of the trade discounts. Suppliers give discounts to encourage early payments Thus, payment within the discount period results in less outflow of cash. However, cost and benefit ; must be done before availing of such discount. ce of good credit rating. Having a good current and quick asset ratio on a par with the the firm will be able to maintain good credit standing with suppliers offering favorable r unexpected events. te. Having enough cash enables the firm to face its competitor by expanding products or advertisements. Requirements factors that affect cash requirements. nagement. This refers 0 the amount of business operations. It is dependent ing may hold a cash balance at low levee the need arises. cash a firm needs to cover for ‘on how fast cash is generared with good credit stand k ae always available when1 following tools may be us ‘The following tools may be used for controlling cash flows, 1. Synchronizing cash Flow . Cash floats on a. payments b. collections Extending cash payments, |. Availing of cash discounts .. Optimum transaction size synchronizing Cash Flows ‘This is a process in which the cash inflows coincide with the out z : ws coincide wit flows. A synchronized cash flow is highly dependent on an accurate forces of inflows and ouows. A more courage hea minimize its cash balance since it can immediately determine the time when cash will actually be needed. ‘Asa result, there will be less borrowings, lower interest expense, and maximized profits. E Floats on Disbursements “These are the differences between the company’s book balance and bank account balance in any period - oftime. Floats exise when the firm issues its own check and sends it to the payee company. The payee, in ferurn, has to deposit the check in their bank account. The number of days from the issuance of the check foits clearance is known as float days. The issuer of the check prefers that the recipient deposits the check. i bank at a much later date. This is because the time interval ot float days give the check issuer an ‘to use the fund. Contrary to this, the recipient of the check would prefer to have the check. te use. However, for various reasons, the check may not be deposited in che bank. ‘of the check, getting lose in transit, or technical errors or problems in the check some of the reasons for the delay of clearing. Geographical location is also another factor ing of checks may be delayed. Checks are cleared depending on the type of check issued. takes a day for clearing, local checks take three days’ clearing, the regional checks take five Frown checks take about seven to ten days. into three categories: 7 is “rom the time the check issued up ro the time the check recived y the Pass loat. It is from the time the checkis received by the payce until the time itis deposited ris from the date the check is deposited up to the date the check is cleared aa ‘worxing Capaatand Cash Management 16¢, Centralization of disbursements, Other fir centralizing it her firms control thelr eash disbursement by this way, fi ys firms are able to monitor thet the optimum time. Firms can select creditor o ras be pala Ute ete sce concn pea divors who must be paid firs and extend el Use of statistics o predict the amount of checks i ; Serene 4 issued. By lookin fie ofthe fem one can cesablch how rach fund eb dpe Ee Ne ae Tor peal and divdend papi Te Breropeatpe tia Soa areca ce ldo sie the eas or divide three te amount ofthe deck be ete a es fi ae ae jvidends. firm can approxi te s or the beneficiary of the pies jpproximate the funds it needs to cover the check issuances based on Example Salary payment of XYZ Company is mad 5. fe every 15% and 30 of the month through i of checks. It pays P5,250,000 per payroll, However, based on the historical ee ee con salarys 509% will be presented on the day itself, 35% five days from the salary date, and the remaining balance on the tenth day after the salary date. I s f the interest ‘annum, how much is the incremental income of XYZ Comp: ae ‘An analysis of the problem is as follows: ‘on market is 12% per any ifthe entire amount isnot deposited? Incremental income from salary date to five days from salary date (P'5,250,000 50% x 12% x 5/360) Incremental income from five days to tenth day From salary date (P 5,250,000 x 15% x 1296 x 5/360) 1,312.50 oral incremental income P 5,687.50 P4,375.00 By not covering the entire amount of the payroll, the firm will generate ‘an incremental income of P5,68750. Thus, the firm has to deposit only the amount ‘of P2,625,000 on the day of salary payment and the remaining, balance of 2,625, placed in ehe marker at 1296 pet annum earning an interest amounting (0 4,375. The next deposit will take place on the fifth day from the salary date amounting t° 'P1,837,500 and the remaining ‘balance of P787,500 shall be placed ‘again at 12% that ‘would earn an interest amounting to 1,312.50. shoretrm financing, Howeves forthe PES of discussion, iwi eh discoun is offered bY UPRICS of goods to the purchases © ae ot paying within the discoune period ina opportuni 251 : it eypcally eke advantage ‘of a discount offer ping eyonashe normal ‘understanding omer Its benefits include | if the term of sale is 2/10 net! Otherwise, the total amount | monscrmescnnnat A a o