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Working Capital
Management &
Budgeting as an
Instrument
Prepared By:
WCM
Norhaifa a S. Kadapi
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Working Capital Management

o Working Capital (short-term financial) is the management
of current assets and current liabilities.
✓ Current Asset – Inventory, accounts receivable,
marketable securities, and cash
✓ Current Liabilities – notes payable accruals, and
accounts payable
o The management is to ensure that the firm has adequate
working capital to run its business operations smoothly.
o It should have neither excess working capital nor
inadequate working capital.
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✓ CASH – enough to support firm’s operation

✓ ACCOUNT RECEIVABLE
– not to be too lax nor too strict in granting
credits
✓ INVENTORY– enough to support market
demand
✓ CURRENT LIABILITIES :
be prudent in making use of the time before it
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EXCESSIVE WORKING
o Means idle funds which earn no profits for business and
CAPITAL
hence business cannot earn a proper rate of return.
o When there is a redundant working capital it may lead to
unnecessary purchasing and accumulation of inventories
causing more chances of theft, waste.
o It may result into overall inefficiency in organization.
o Due to low rate of return on investments, the value of
shares may also fall.
o The redundant working capital gives use to speculative
transaction
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Inadequate Working Capital

o Inability to pay its short-term liabilities in time.
o It cannot buy its requirements in bulk and cannot avail of
discounts.
o It becomes difficult for firm to explicit favorable market
conditions and undertake profitable projects due to lack of
working capital.
o The rate of return on investments also falls with shortage of
working capital.
o The firm pay day-t-day expenses of its operations and it
created inefficiencies, increase costs and reduces the
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Trade-off between Profitability

and risk
o Profitability is the relationship between revenues and costs
generated by using the firms assets - both current and fixed
– in productive activities.
✓ a firm can increase its profit by (1) increasing revenues
or (2) decreasing costs.
o Risk is the probability that a firm will be unable to pay its as
the come due.
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Effects changing Ratios on

RATION
Profit &PROFIT Risk EFFECT ON RISK
CHANGE IN RATIO EFFECT ON

CURRENT ASSETS INCREASE DECREASE DECREASE

TOTAL ASSETS DECREASE INCREASE INCREASE

CURRENT LIABILITIES INCREASE INCREASE INCREASE

TOTAL ASSETS
DECREASE DECREASE DECREASE
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CASH CONSRVATION CYCLE

The cash conversion cycle (CCC) is the length of
time required for a company to convert cash
invested in its operations to cash received as a
result of its operation.
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CALCULATING THE CASH

o CONSRVATION
A firm’s operating cycle(O) is theCYCLE
time from the
purchase of inventories to collection of cash from the
sale of these inventories.
o It is measured in elapsed time by assuming the
average age of inventory (AAI) or average selling
period (ASP) and the average collection period (ACP).
OC = ASP + ACP
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o However, the process of producing and selling a product

also includes the purchase of inventories on account, which
result in accounts payable.
o Average payment period (APP) the time it takes to pay the
accounts payable measured in days.
o The operating cycle less the payment period yields the cash
conversion cycle. The formula for the cash conversion cycle
is: CCC = OC - APP
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substituting for OC, we can see that the cash

conversion cycle has three main components, as shown in the
following equation:
(1) Average selling or Average on Inventory (AAI)
(2) Average Collection Period (ACP)
(3) Average Payment Period (APP)
CCC = ASP + ACP – APP
CCC = (365/INVENTORY TURNOVER + 365/AR TURNOVER)
– (365/AP TURNOVER)
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A permanent funding requirement is a

constant investment in operating assets resulting
from constant sales overtime.
a seasonal funding requirement is an
investment in operating assets that varies over
time as a result of cyclic sales.
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In its 2017 annual report, luzvimin Corporation

reported that it had revenues of P18 billion, cost of goods sold
of P16.8 billion, accounts receivable of P2.4 billion, inventory
of P2.1 billion and accounts payable of P1.25 billion. Total
purchases for the year was P11.25 billion.(use 360 working
CCC=ASP+ACP-APP ).
days).
ASP= 360/(16.8B/2.1B)=45 DAYS
ACP=360/(18B/2.4)=48 DAYS
APP=360/(11.25B/1.25B)= 40 DAYS
CCC=45+48-40
CCC= 53 DAYS
 The balance sheet of Olive Industries for December 31, 2016
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contains the following. The amounts also pertain to the average for the
year. UseAssets
360 working days. Liabilities And Shareholders Equity
Cash Accounts payable 56, 250
10,000 Notes Payable 17, 000
Marketable Securities 80, 000 Other Current Liabilities 52, 000
Accountable Receivable 60, 000 Long term Debt 82,
Inventories 100, 000
000 ). Preferred Stock 50,000
Plant and Equipment 220,000 Retained Earnings 84, 750
Net Plant Equipment 156, 000
Total Liabilities
Sales for the year amounted to P720,000. MarkSEup on cost is
Total Assets 342,000
60%:
342,000
1. What is the Working Capital?
2. Determine the cash Conversion cycle.
Sales for
Babthe
I year amounted
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P720,000.
III Mark
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60%:
1. What is the Working Capital?
WC= CA+CL
= 250,000-125,250
= 124,750
2. Determine the cash Conversion cycle.
CCC=ASP+ACP-APP ).
ASP=360/4.5 = 80 DAYS
COGS/AVERAGE
INVENTORY=(720,000/1.6)/100,000=4.5
ACP= 360/12=30 DAYS
SALE/AVERAGE ACCOUNT
RECEIVABLE=(720,000/60,000)=12
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Thank You
Do You Have Any Questions?