Learning Objectives:: in This Lesson, You Will Be Able To: A) Explain Tools in Managing Cash, Receivables and Inventory

BUSINESS FINANCE
Senior High School Specialized Grade 12
LEARNING OBJECTIVES:
In this lesson, you will be able to:
a) Explain tools in managing cash, receivables and

inventory
BUSINESS FINANCE
WORKING CAPITAL MANAGEMENT
WORKING CAPITAL
it refers to the current assets used in the
operations of the business
this includes cash, accounts receivable,
inventories and prepaid expenses
this also includes current liabilities such as trade
accoutns payable and accrued expense payable
BUSINESS FINANCE
WORKING CAPITAL FINANCING POLICIES
Maturity-matching working capital financing

policy
 Aggressive working capital financing policy
 Conservative working capital financing

policy
BUSINESS FINANCE
MATURITY-MATCHING WORKING CAPITAL

FINANCING POLICY
permanent working capital requirements should
be financed by long-term sources while temporary
working capital requirements should be financed
by short-term sources of financing.
BUSINESS FINANCE
AGGRESSIVE WORKING CAPITAL FINANCING

POLICY
some of the permanent working capital
requirements are financed by short-term sources
of financing
by financing some of the permanent working
capital requirements with short-term sources of
financing, financing cost is minimized which in
turn, improves net income.
BUSINESS FINANCE
CONSERVATIVE WORKING CAPITAL

FINANCING POLICY
even some of the temporary working capital
requirements are financed by long-term sources of
financing
 this policy minimizes liquidity risk but it also
reduces the company’s profitability because
long- term sources of financing entail higher
cost.
BUSINESS FINANCE
MANAGING THE FIRM’S INVESTMENT IN CASH
CASH
the currency and coin the firm has on hand in
petty cash drawers, in cash registers, or in checking
account at various commercial banks
Why do company holds cash?

BUSINESS FINANCE
MOTIVES FOR HOLDING CASH
 Transactions motive
 Precautionary motive
 Speculative motive
BUSINESS FINANCE
TRANSACTIONS MOTIVE
Balances held for transaction purposes allow

the firm to meet its cash needs that arise in the
ordinary course of doing business
TRANSACTIONS MOTIVE
It is for holding cash relates to the maintenance
of balances used to satisfy possible, but as yet
unknown, needs
BUSINESS FINANCE
SPECULATIVE MOTIVE
Cash is held for speculative purposes in order to

take advantage of potential profit-making
situations
BUSINESS FINANCE
COMMON PRACTICE FOR A GOOD INTERNAL

CONTROL
A basic internal control system entails the
assignment of custodial function and recording
function to separate individuals, unless you are the
owner.
Cash collections should be supported by official
receipts which are summarized in a daily collection
report.
BUSINESS FINANCE

CONTROL
A good internal control over cash is by
depositing all collections intact.
If all collections need to be deposited, then

payments must be made through a check voucher
system.
BUSINESS FINANCE

CONTROL
For small payments like the fare given to a
messenger, a petty cash fund is used.
The check must also be cross-checked by

drawing two lines on the payee section of the
check.
BUSINESS FINANCE
ACCOUNTS RECEIVABLE
The collectability of accounts receivables

depends largely on the quality of customers. The
quality of customers depends on the standards or
credit policies set up and used by an
organization.
BUSINESS FINANCE
5C’s USED IN CREDIT VALUATION

 Character
–the willingness of the borrower to repay the
loan
Capacity
– a customer’s ability to generate cash flows
Collateral
– security pledged for payment of the loan
BUSINESS FINANCE
5C’s USED IN CREDIT VALUATION

Capital
– a customer’s financial resources
Condition
– current economic or business
conditions
BUSINESS FINANCE
MANAGING THE FIRM’S INVESTMENT IN

ACCOUNTS RECEIVABLE
Terms of Sale
Type of Customer
Collection Effort
BUSINESS FINANCE

ACCOUNTS RECEIVABLE
Terms of Sale
Discounts for early payment
Discount period
Total credit period
Annualized opportunity cost

BUSINESS FINANCE
ANNUALIZED OPPORTUNITY COST
a = discount rate
b = discount period
c = total credit period
BUSINESS FINANCE

ACCOUNTS RECEIVABLE
Type of Customer
involves determining the type of customer
who qualifies for trade credit
Credit scoring – numerical evaluation of
each applicant
BUSINESS FINANCE

ACCOUNTS RECEIVABLE
 Multiple Discriminant Analysis
a statistical technique for calculating the
appropriate importance to assign each
question used in evaluating the applicant
BUSINESS FINANCE
MULTIPLE DISCRIMINANT ANALYSIS

BUSINESS FINANCE

ACCOUNTS RECEIVABLE
 Collection Effort
Ratio Analysis
Aging of Accounts Receivable
BUSINESS FINANCE

INVENTORY
Inventory Management
Involves the control of the assets that are
produced to be sold in the normal course of
the firm’s operations
BUSINESS FINANCE
TYPES OF INVENTORY
Raw Materials Inventory – consists of basic materials
purchased from other firm to be used in the firm’s
production operations
Work-in-process Inventory – consists of partially
finished goods requiring additional work before they
become finished goods
Finished goods Inventory – consists of goods on which
production has been completed but that are not yet sold
BUSINESS FINANCE
INVENTORY MANAGEMENT TECHNIQUES

Order Quantity Problem – it involves determining the
optimal order size for an inventory item given its
expected usage, carrying costs, and ordering costs
Order Point Problem - determining how low inventory

should be depleted before it is reordered
BUSINESS FINANCE
ECONOMIC ORDER QUANTITY (EOQ)

It is the model that attempts to determine the order
size that will minimize total inventory costs
BUSINESS FINANCE
ECONOMIC ORDER QUANTITY (EOQ)

Suppose that a firm expects total demand (S) for its
product next year to be 5,000 units. Moreover, to place
an order the firm incurs an ordering cost of 200, and the
carrying cost per unit is 2. What is the EOQ for the
company?
BUSINESS FINANCE
ASSUMPTIONS OF THE EOQ MODEL

Constant, or uniform, demand
A constant unit price
Constant carrying costs
Constant ordering costs
Instantaneous delivery
Independent orders
BUSINESS FINANCE
ORDER POINT PROBLEM

Safety stock
inventory held to accommodate any unusually
large and unexpected usage during delivery time
Delivery-time stock
the inventory needed between the order date
and the receipt of the inventory ordered

Learning Objectives:: in This Lesson, You Will Be Able To: A) Explain Tools in Managing Cash, Receivables and Inventory

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BUSINESS FINANCE

Senior High School Specialized Grade 12

In this lesson, you will be able to:

a) Explain tools in managing cash, receivables and

WORKING CAPITAL MANAGEMENT

WORKING CAPITAL FINANCING POLICIES

Maturity-matching working capital financing

 Aggressive working capital financing policy

 Conservative working capital financing

MATURITY-MATCHING WORKING CAPITAL

AGGRESSIVE WORKING CAPITAL FINANCING

CONSERVATIVE WORKING CAPITAL

MANAGING THE FIRM’S INVESTMENT IN CASH

Why do company holds cash?

MOTIVES FOR HOLDING CASH

Balances held for transaction purposes allow

Cash is held for speculative purposes in order to

COMMON PRACTICE FOR A GOOD INTERNAL

COMMON PRACTICE FOR A GOOD INTERNAL

If all collections need to be deposited, then

COMMON PRACTICE FOR A GOOD INTERNAL

The check must also be cross-checked by

The collectability of accounts receivables

5C’s USED IN CREDIT VALUATION

5C’s USED IN CREDIT VALUATION

MANAGING THE FIRM’S INVESTMENT IN

MANAGING THE FIRM’S INVESTMENT IN

Annualized opportunity cost

ANNUALIZED OPPORTUNITY COST

MANAGING THE FIRM’S INVESTMENT IN

MANAGING THE FIRM’S INVESTMENT IN

MULTIPLE DISCRIMINANT ANALYSIS

MANAGING THE FIRM’S INVESTMENT IN

MANAGING THE FIRM’S INVESTMENT IN

INVENTORY MANAGEMENT TECHNIQUES

Order Point Problem - determining how low inventory

ECONOMIC ORDER QUANTITY (EOQ)

ECONOMIC ORDER QUANTITY (EOQ)

ASSUMPTIONS OF THE EOQ MODEL

ORDER POINT PROBLEM

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