MODULE 3

SESSION 2:

THE ENTREPRENEUR MANAGING RESOURCES

Geniva Nario, CAR MEntrep & Mar Belgica, Entrep Module in The Entrepreneurial Mind Bicol University
August 2020 College of Business, Economics, and Management – Entrepreneurship Department
What Is This Session About?

This session will provide you the importance of an enterprise is required to maintain a balance
between liquidity and profitability while conducting its day to day operations. Liquidity is a
precondition to ensure that firms are able to meet its short-term obligations and its continued flow
can be guaranteed from a profitable venture. The importance of cash as an indicator of continuing
financial health should not be surprising in view of its crucial role within the business. This requires
that business must be run both efficiently and profitably. In the process, an asset-liability mismatch
may occur which may increase firm’s profitability in the short run but at a risk of its insolvency
(Kesseven, 2006).

On the other hand, too much focus on liquidity will be at the expense of profitability and it is
always advisable to understand the risk and return tradeoffs inherent in alternative working capital
policies. Thus, the owner of a business entity is in a dilemma of achieving desired trade-off between
liquidity and profitability in order to maximize the value of a firm. (Gitman,1984 and Bhattacharya,
2001)

The short term decisions in production/operation are based on daily flow of money. It necessitates
proper management of the resources for effective operation and survival of the business. This is supported
by the Agency theory which is a characteristic of all modern firms that the principals are not the same
people as the agents. This creates situations in which goals of principals and agents may not be the same
(Bowie and Freeman, 1992).

As the business operates it is important to set performance measures by comparing actual figures
with the budgeted figures. This is in agreement with the management control theory which suggests the
need for control after the agent’s actions are known and prior to the agent taking action (Smith and
Bertozzi, 1998).

Are you ready?

Inhale……

Exhale….

HANGOS HALAWIG!

OK! LET’S DO IT

Geniva Nario, CAR MEntrep & Mar Belgica, Entrep Module in The Entrepreneurial Mind Bicol University
August 2020 College of Business, Economics, and Management – Entrepreneurship Department
What Will You Learn?

In this module, you are expected to achieve the following

1. Value the importance working capital.

2. Set up management policies for cash, debtors, inventories and payables.

What Do You Already Knows?

How many friends do you have? Not in Facebook or a follower on twitter and instagram but a real
and true friend who you trust and they trust you.

I know you have a friend:

1. Who always borrows your ballpen, bag, hat, umbrella etc.

2. A friend that lends you money.
3. And a friend that borrows you cash

Now my question is do you have a record of them that these people borrowed your things and these
people borrowed cash from me and these people I owe them a cash or you just put it in your mind because
you know yourself that you will never forget it?

Let’s Reflect

Having all those kinds of friends we need keep records and set a proper up management policies
on how are they going to pay us in terms of cash that we lend to our friends, on how are they going to keep
and handle the things they borrow from us and if you borrow cash from your friends you need also to see
to yourself when are you going to pay your debt to your friend.

Because we never know one or two more of your friend will be your network in your soon to be
empire. Keeping track with your resource is what we are going to study in this session the value and
importance of working capital. So let’s finish this.

Geniva Nario, CAR MEntrep & Mar Belgica, Entrep Module in The Entrepreneurial Mind Bicol University
August 2020 College of Business, Economics, and Management – Entrepreneurship Department
Let’s Study (Input):

Working Capital refers to all the current assets (debtors, cash,

inventories and near cash assets) that can be used to meet day to day
obligations of the business. However it is important for an entrepreneur to
determine the net working capital, the difference between and
organization’s current assets and its current liabilities. Managing working
capital involves taking various decisions and actions on the current assets
and current liabilities as shown in the figure below, e.g. deciding to buy
inventory in cash or on credit.

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Working capital cycle is a “Merry go around”

The working capital cycle is a “Merry-go-round” process, i.e. a never-ending cycle of activities
and events. Time and money are crucial: This
links directly with the cash operating cycle,
i.e. how long it takes to get cash after
producing a good or providing a service.
When you use borrowed money (bank
overdraft) to finance working capital, then it
will attract interest, which will strain the
business financially. Collection of debtors
faster releases cash from the cycle while slow
collection ties up cash.

Better credit terms from creditors in

terms of duration and amount will increase the cash resources. Faster moving inventory will free up cash
while slow moving inventory will consume cash.

Managing of working capital ensures profitability and liquidity. Profitability means:

The situation in which a company, product, etc. is producing a profit. Liquidity means: The state of having
enough money or assets to pay any money that is owed.

The major elements in the working capital cycle are cash, inventory, receivables and payables.
Each of these elements has a dimension (extent) of time and money which are crucial in managing working

Geniva Nario, CAR MEntrep & Mar Belgica, Entrep Module in The Entrepreneurial Mind Bicol University
August 2020 College of Business, Economics, and Management – Entrepreneurship Department
capital. Therefore this cycle links directly with the cash operating cycle that is, how long it takes to get
cash after producing a good or providing a service.

When you use borrowed money (bank overdraft) to finance working capital, then it will attract
interest which will strain the business financially. If you can get money to move faster around the cycle or
reduce the amount of money tied up then the business will generate more cash or it will need to borrow
less money to fund working capital.

When the business collects receivables (debtors) faster than cash is released from the cycle.
However, slow collection of debtors ties up cash. Better credit terms from creditors (suppliers) in terms of
duration and amount will increase the cash resources. Faster moving inventory will free up cash while slow
moving inventory will consume cash.

The purpose of managing working capital is, Liquidity; to ensure that the business is able to meet
its day to day obligations as they fall due. Profitability objective; instead of the business holding idle current
assets, such assets are invested to generate returns for the entrepreneurs.

Components of Working Capital

Current assets

• Debtors (receivables)

• Stocks (inventories)

• Cash (on hand & in bank)

Current liabilities

• Creditors (payables)

Management of Debtors (Receivables)

The purpose of managing debtors is to obtain payment from customers as fast as possible. And
improve the cash flows as you minimize the risk of bad debts and not being paid at all.

Measures to manage debtors develop cash discount system to encourage cash sales (add discount on
price, make sure your costs are covered). (1) Obtain up-front deposits and schedule payments. (2) Strict
credit check for new customers. (3) Agree on a set of credit control procedures such as issuing sales
invoices, producing customer statements of outstanding balances (credit policy). (4) Credit policy should
be clearly understood by employees, suppliers and customers. (5)Establish credit limits for each customer
and stick to them and continuously review these limits.(6) Keep very constant contacts with your larger

Geniva Nario, CAR MEntrep & Mar Belgica, Entrep Module in The Entrepreneurial Mind Bicol University
August 2020 College of Business, Economics, and Management – Entrepreneurship Department
debtors. (7)Invoice promptly and clearly to avoid delayed payments. (8) Charge penalties on overdue
payments. Record the credit sales / customers.

Reasons why Businesses fail to collect their Money from Debtors

Wrong credit judgment of the debtor.

Poor collection procedures e.g. cumbersome procedures may cause customers to delay payment.

Negligence in the enforcement of credit terms.

Slow issue of invoices or debtor’s statements.

Errors in invoices or debtor’s statements.

Customer dissatisfaction.

Debtors’ Collection Period

Average length of time required to collect debtors.

A lower number of days is desirable and more efficient.

The longer the customer owes the business money, the greater the chance that it will never get
paid (bad debt).

Debtors due over 30 days (unless within agreed credit terms) should generally demand immediate
attention.

Send them reminders and if this fails seek legal advice or court action for debtors that are not
willing to pay.

Management of Payables (Creditors)

Management of creditors and suppliers is just as important as the management of your debtors.
The Purpose of managing Payables is to negotiate with suppliers for longer credit periods in which to pay
business expenses.

Measures to manage Creditors (1) Record all the credit purchases/suppliers.(2) Monitor the
creditor’s due dates. (3) Pay the creditors as agreed to maintain trust.

Creditors’ Payment Period

Geniva Nario, CAR MEntrep & Mar Belgica, Entrep Module in The Entrepreneurial Mind Bicol University
August 2020 College of Business, Economics, and Management – Entrepreneurship Department
 If you pay your creditors more rapidly than you are paid by your customers, you will need a high
level of working capital. Average length of time required to pay creditors. A longer period is desirable for
the business to operate effectively (see order flow in the Operations Plan).

Management of Inventories (Stock)

The purpose of Inventory Management is to ensure availability of optimal stock levels which:
Allows uninterrupted production, reduces the investment in inventory / stocks. Minimize reordering costs.
Stock consists of raw materials, work in progress and finished goods.

Importance of inventory management is to reduce excessive stocks which can place a heavy
burden on the cash resources of a business. And to minimize lost sales, delays for customers which may
result from insufficient stocks.

Ways of Inventory Management

 Carry out stock counts.

 Know how quickly overall stock is moving.

 Review the effectiveness of existing purchasing and inventory systems.

 Establish the stock turnover period for all major items of stock.

 Sell off outdated or slow moving stock faster.

 Review security procedures to ensure that no stock is stolen.

 Ensure effective use of storage facilities.

Stock Turnover Period

Average number of day’s stock is held in the business before a sale. The shorter this period the
better because some stock is perishable and obsolete. A longer period implies that management is unable
to sell existing stocks. Average stock-holding periods will be influenced by the nature of the business e.g.
a fruit shop might turn over its entire stock every few days while a clothes business would be much
slower.

Geniva Nario, CAR MEntrep & Mar Belgica, Entrep Module in The Entrepreneurial Mind Bicol University
August 2020 College of Business, Economics, and Management – Entrepreneurship Department
Optimal Level of Stock

Identify the fast and slow moving stock to get the best (optimum) stock levels for each category
so as to minimize the cash tied up in stocks. There are factors that determine optimum stock levels: What
are the projected sales of each product? How widely available are raw materials, components etc.? How
long does it take for delivery by suppliers? Can you remove slow movers from your product range without
compromising sales? Identify market factors that affect sales, e.g. weather e.t.c.?

Management of Cash

Cash is the oxygen that enables a business to

survive and prosper and is the primary indicator of
business health. Business may survive for a short time
without sales or profits but without cash it may collapse
or die.

Measures for good cash management; (1)

Knowing when, where, and how your cash needs will
occur. And keeping good relationships with bankers,
other creditors, family and friends.

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BUDGETING

A budget is numerical representation of an action plan for a specified time period. It is a planned
outcome of the future. The aim is to make total income for a given period greater than the total expenses
in order to improve profitability. Businesses usually prepare a budget for a financial year but can also be
prepared monthly, weekly or daily to make the process manageable and feasible. Budgeting plays a key
role in business and is important for all businesses whether large or small.

A budget is important for the following reasons: It is required by investors and funders it helps in
the management of business in meeting the objective of the business. And it helps in identifying
problems before they occur such as the need for more finances. It improves decision making, increases
motivation of employees because they have to meet targets. It is a tool for monitoring performance of the
business.

Geniva Nario, CAR MEntrep & Mar Belgica, Entrep Module in The Entrepreneurial Mind Bicol University
August 2020 College of Business, Economics, and Management – Entrepreneurship Department
Steps for Preparing the Budget

The first step is to prepare your budget

identify your business objectives, determine
the period of budgeting whether yearly
monthly, weekly or daily. Estimate your sales
and your expenses and put them together you
will come up with your budgeting.

Format of Income & Expenditure Budget

Table shows the sample format of Income &

Expenditure highlighting the income and
expenses monthly you can use this table in
your daily life to identify if per day how much
is your expense. Or use this when you start
your business.

Potential Expenses

Below are the potential expenses when you engage in business.

Direct Expenses

Raw materials

Salaries & wages

Delivery / transport

Indirect Expenses

Prints & stationary Postage

Geniva Nario, CAR MEntrep & Mar Belgica, Entrep Module in The Entrepreneurial Mind Bicol University
August 2020 College of Business, Economics, and Management – Entrepreneurship Department
 Advertising License fees / tax

Insurances Rent

Professional fees (e.g., accountant, attorney) Security

Motor vehicle (insurance, licenses, petrol) Savings

Repairs / Maintenance Loan interests

Power & supplies (Electricity, gas, water, heat) Bank fees

Telephone / mobile / fax

An Example of Cash Budget

Table shows example of cash budget.

Variance Analysis

Variance is difference between the budgeted and actual figures. Analysis means computing the
variances and determining the source of those variances.the causes of variances are changes in interest
rates, fluctuations in demand, calculation errors and changes in plans.

Geniva Nario, CAR MEntrep & Mar Belgica, Entrep Module in The Entrepreneurial Mind Bicol University
August 2020 College of Business, Economics, and Management – Entrepreneurship Department
 Table 1 Variance Analysis Results

Item Variance Result

Income Budgeted > Actual Unfavourable

Income Actual > Budgeted Favourable

Expenses Budgeted > Actual Favourable

Expenses Actual > Budgeted Unfavourable

Table 2 An Example of Income Variance Analysis

Item Budgeted Actual Variance Result

Sales 500,000 450,000 - 50,000 Unfavourable

Other income 100,000 120,000 20,000 Favourable

Table 3 An example of Expense Variance Analysis

Item Budgeted Actual Variance Result

Raw material 150,000 180,000 -30,000 Unfavorable

Salaries 200,000 160,000 40,000 Favorable

Utilities 100,000 150,000 -50,000 Unfavorable

Geniva Nario, CAR MEntrep & Mar Belgica, Entrep Module in The Entrepreneurial Mind Bicol University
August 2020 College of Business, Economics, and Management – Entrepreneurship Department
 Table 3 shows Investigate variances whether favorable or unfavorable and action should be taken.
Unfavorable variance of (50,000) on sales may be due to fall in demand. Aggressive marketing may be
taken on. Unfavorable variance of (30,000) on raw materials may be due to increase in prices. Good
negotiation skills and cheaper suppliers may be a solution to this effect.

Let’s Think About This

Who has a business up and running? Or if you don’t have a business up and running try to relate
it in your life experience? How long does it take to collect your cash from debtors? How can you make
sure you get the money on time? How long does it take you to pay your creditors? How long do you hold
stock before making a sale? How do you determine your stock levels? Provide example in each question.

Let’s Try This

Case on Working Capital

Britany is a distributor of native bags. Her business is 2 years old with an annual profit of Php
10,000,000. He operates with a bank overdraft of Php 3,000,000. She won a contract to supply native
bags to Kyuareste Company but will be paid 120 days after delivery. She calls his supplier Joseph Aguila
and orders for the native bags to fulfil the contract in the starting months.

Month 1
Transactions go on well and all the Suppliers deliver the orders as promised but he is short of space to
store them.

Month 2
Business is still good. He makes his first delivery to the Kyuareste Company which increases his overdraft.

Month 3
Britany is in a ditch. She has made more deliveries to the Kyuareste Company but his overdraft is at the
limit and is getting calls from unpaid suppliers.

Month 4
Britany is in a crisis. She cannot pay all the suppliers. Some suppliers stop delivering and threaten legal
action. However she thinks the situation will stabilise since he is still supplying the Kyuareste Company.

Geniva Nario, CAR MEntrep & Mar Belgica, Entrep Module in The Entrepreneurial Mind Bicol University
August 2020 College of Business, Economics, and Management – Entrepreneurship Department
Month 5
His overdraft is 5,000,000 over the limit. Two suppliers start legal action. The bank refuses to pay anymore
cheques. Luckily enough she receives her first payment from the Kyuareste Company.

Month 6
The subsequent payments from the Kyuareste Company delay and he cannot fulfil any more orders. The
bank demands for payment of the overdraft within 10 working days. Britany closes business and blames
the bank.

1. Imagine you are Britany, how would you have managed the situation differently?
2. Suppose you are the bank, what prior information would you have given to Britany before taking
the bank overdraft?

Excellent! Pagpupuri para sa isang napakasipag na mag aaral! You’re done with module three
session two! Let us move on to the next session the entrepreneurs tracking his records. The Last session
for module 3.

Geniva Nario, CAR MEntrep & Mar Belgica, Entrep Module in The Entrepreneurial Mind Bicol University
August 2020 College of Business, Economics, and Management – Entrepreneurship Department