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 Working capital is defined as the total firm’s
investment in current assets used in its day-to-day
operations. Some refer to it as a revolving capital or
operating assets.
Rationale for the need of working capital
 Enable the firm to settle all its maturing obligations
on time
 Be able to defray all expenses incurred in the
business operations such as salaries, utilities,
rentals, insurance premia, taxes, etc.
 To replenish inventories within the time frame
 To support its credit sales and
 Provide for any possible contingencies or
opportunities for investment.
The principal current assets of a firm:
 Cash-refers to current assets comprising currency or currency
equivalents that can be accessed immediately or near-

 Marketable securities-Very liquid securities that can be
converted into cash quickly at a reasonable price. Include
commercial paper, banker's acceptances, Treasury bills and
other money market instruments

 Account receivable-money owed to a business by its clients
(customers) and shown on its Balance Sheet as an asset.
money owed to a business by its clients (customers) and
shown on its Balance Sheet as an asset.

 Inventories -A complete list of items such as property, goods in
stock, or the contents of a building.
 These assets responds normally to the seasonal
fluctuation in the sales of the firm because they arise
in the process of generating income that are related
to sales activities.
 An efficient administration of current assets would
mean a profitable endeavour for the business.
Sufficient and proper financing is needed to keep the
business going.
 Permanent working capital – when the firm uses
working capital sufficient to support a normal level of
 Emergency or seasonal working capital – when
operations start to pick up, the firm need additional
funds to finance the peak season.
Factors affecting the required amount of
working capital
 The firm’s term of purchase and sale
 A firm that purchases its inventories on credit will require a
small amount of working capital
 If inventories are acquired on cash basis, a bigger working
capital will be needed
 The turnover of merchandise inventory
 A firm that produces goods that are fast moving item or
saleable ones do not need a bigger working capital
 A firm producing slow moving items may require a bigger
working capital
 Volume of goods on hand to satisfy customers demand
 A firm that maintains safety stocks needs a bigger working
capital than that which do not maintain such stocks
Factors affecting the required amount of
working capital
 The type of business activity
 A business that requires a big investment in inventories
(manufacturing) requires a much bigger working capital to be
able to maintain the needed volume of inventories
 Firm like merchandising needs smaller working capital
 The turnover of its receivables
 Collection of receivables within a short period of time means
cash inflows in short period of time thus requiring smaller
working capital
 Firm that allows a longer period for the payment of sales on
credit will require a bigger working capital as a support to the
 Business influenced by business cycles
 A firm that is influenced by the ups and downs of business
cycles, is going to need a bigger working capital, for a certain
period determined by the firm, production must be increased
thus a need for bigger working capital

Management of cash
 Cash is the most liquid yet the least productive
 It enables payment of obligations when due but
lessens productivity when it is hoarded.
 Strategies in cash management are formulated
aiming at two important goals:
1) to make cash available when needed to meet the firm’s
2) to maintain the least amount of idle cash being held by
the firm.
 There are two assets being regarded as liquid asset:

Cash- is composed of bills and coins that the firm
holds in its possession.
Near Cash - its ability to be easily converted into cash
like marketable securities.
Three reasons for holding cash
 To maintain a state of solvency
 Solvency is the degree to which the current assets of an
individual or entity exceed the current liabilities of that individual
or entity.
 ability of a corporation to meet its long-term fixed expenses and
to accomplish long-term expansion and growth
 As a precautionary motive
 In order to patch up contingencies that are beyond human
 As a speculative motive
 Profit making opportunity for a business firm
Strategies in cash management
A good financial management involves efficient
management of cash. This could be attained by
accelerating cash collections and decelerating cash
Accelerating cash collection:
 Cash discounts
 Concentration banking
 Synchronizing cash inflows and cash outflow
 Collection from Post dated checks
Decelerating Cash Disbursement:
 Stretching payables through PN

Management of receivables
 Receivables are created when a firm sells its product
and/or service on credit in the use of credit cards and
purchase orders.
 The more credit sales the firm has, the bigger receivables
be determined as a result of credit sales
 With credit policies the granting of credit to its customers
will be subject to existing company’s policies:
 Terms of sales – refers to the time period in which buyers must
pay and the terms of the sale.
 Type of customers
 Collection procedures
 Credit standard- a measure of determining those who will be
extended credit facilities or not
Consequences to credit sales
The consequence of credit is that the capital of
the firm is transformed into an investment in the form
of accounts receivable. When the greater portion of
its sales are on credit, mounting account receivables
as a consequence may create a problem of how
much needed capital should be made available to
support such an accumulation of receivables
originating form credit sales.
Inventory management
 it is necessary in controlling the assets being
produced and sold. At the same time the company
can minimize entailing the cost of producing and
maintaining said goods in its normal course of
operations. The assets that are referred to here are
the raw materials, goods in process, finished goods
and spare parts.