Working

Capital
Management
What is Working Capital?
 It is money available to a company for day-to-day
operation.

 It is the difference between a company’s current assets,

such as Cash, Accounts Receivable, and Inventories, and
its current liabilities, such as Accounts Payable and Loan
Payables.

 Working Capital = Current Assets – Current Liability

What is Working Capital?
CURRENT ASSETS CURRENT LIABILITIES

Cash Accounts Payable

- Handling and using of cash. - Business owners used but not yet paid

Accounts Receivable
- Not yet paid by customers.

Inventory
- Maintaining the no. of stocks to be restored
 Negative Positive
Working Capital Working Capital

The ratio of current assets to liabilities is The ratio of current assets to liabilities is
less than one. greater than one.

Example: Example:

(0.70:1) (3:1)

It indicates that a company can fund its

current operations and invest in the future
activities and growth.

Note
High working capital isn’t always a good thing. It might indicate that the business has to much
inventory or not investing its excess cash.
 Cash

Accounts Inventory
Receivable

OPERATING CYCLE
 The operating cycle is the time
required for a company’s cash to be
put into its operations and then
return to the company’s cash
account.

 The operating cycle is the sun of the

days of inventory (365 or 360
days/inventory turnover) and the
days of receivables (365 or 360
days/accounts receivable turnover)
Working Capital Management
 It refers to a company’s managerial accounting strategy
designed to monitor and utilize the two components of
working capital, the current assets and current liabilities,
to ensure a company has sufficient cash flow in order to
meet short-term debt obligations and operations.
Example 1
Compute the working capital of Roman’s Bakery.
Roman's Bakery
Balance Sheet
As of December 31, 2019 SOLUTION:

Cash ₱ 100,000.00 WC = Current Assets – Current Liability

Accounts Receivable 30,000.00 WC = P155,000 – P65,000
WC = P90,000
Inventories 25,000.00
Total Current Asset ₱ 155,000.00
Equipment 15,000.00
Total Assets ₱ 170,000.00 Therefore, the working capital of Roman’s
Bakery is P90,000.
Accounts Payable ₱ 65,000.00
Roman's Capital 105,000.00
Total Liability & Capital ₱ 170,000.00
Example 2
Compute the working capital of Rose Online Business.
Rose Online Business
Balance Sheet
SOLUTION:
As of December 31, 2019
WC = Current Assets – Current Liability
Cash ₱ 60,000.00 WC = P85,000 – P20,000
Accounts Receivable 10,000.00 WC = P65,000
Inventories 15,000.00
Total Current Asset ₱ 85,000.00
Total Assets ₱ 85,000.00
Therefore, the working capital of Rose
Accounts Payable ₱ 20,000.00 Online Business is P65,000.
Roman's Capital 65,000.00
Total Liability & Capital ₱ 85,000.00
Financial Analysis and Reporting
Financial Statement Analysis
 The objective of accounting is to provide information that
will be helpful in decision-making. Truly enough,
financial statements are able to provide information about
the entity’s financial position, financial performance, and
cash flows.
Financial Statement Analysis
 It is important for the owners and managers of the entity
to be able to evaluate the results of all their business
activities. This analysis can help them:
 Confirm past experiences
 Evaluate present financial results
 Predict future outcomes
Three ways of FS Analysis
1. Horizontal Analysis
2. Vertical Analysis
3. Analysis through ratio interpretation
Horizontal Analysis
Horizontal Analysis is the method of comparing and
analyzing financial results of different accounting periods in
each financial statement account and element.

Amount Percentage
2020 2019
change change
Cash 500,000 400,000 100,000 25%
 Horizontal Analysis Current year less
Prior year
Amount change
over base year
Percentage
2020 2019 Amount Change
Changed
ASSETS
Cash 500,000 400,000 100,000 25.00%
Accounts Receivable 58,500 90,000 - 31,500 - 35.00%
Supplies 28,000 40,000 - 12,000 - 30.00%
The entity’s cash The entity’s cash
Land 360,000 300,000 increased by 60,000 increased by20.00%
P100,000 25% from
Equipment 120,000 120,000 from 2019 to 2020
- 2019 to 2020 -
TOTAL ASSETS 1,066,500 950,000
116,500 12.26%

LIABILITIES AND CAPITAL

Accounts Payable 151,500 100,000
51,500 51.50%
Notes Payable 200,000 200,000
- -
Capital 715,000 650,000
65,000 10.00%
TOTAL LIABILITIES AND CAPITAL 1,066,500 950,000
116,500 12.26%
Horizontal Analysis
2020 2019 Amount Change Percentage Change

Net Sales 5,000,000 4,000,000 1,000,000 25.00%

Less: Cost of Goods Sold 3,000,000 2,400,000 600,000 25.00%

Gross Profit 2,000,000 1,600,000 400,000 25.00%

Add: Other Income 200,000 300,000 -100,000 -33.33%

Revenues 2,200,000 1,900,000 300,000 15.79%

Less: Operating expenses 800,000 900,000 -100,000 -11.11%

Net Income before Tax 1,400,000 1,000,000 400,000 40.00%

Less: Income Tax Expense 420,000 300,000 120,000 40.00%

Net Income 980,000 700,000 280,000 40.00%

Vertical Analysis
Vertical Analysis is the method of analyzing financial results
expressing each financial statement account and element as a
component of a base.

2020 Component

ASSETS
Cash 500,000 46.88%
Accounts receivable 58,500 5.49%
Vertical Analysis
2020 2020 Common Size 2019 2019 Common Size

ASSETS
Cash 500,000 46.88% 400,000 42.11%
Accounts Receivable 58,500 5.49% 90,000 9.47%
Supplies 28,000 2.63% 40,000 4.21%
Land 360,000 33.76% 300,000 31.56%
Equipment 120,000 11.25% 120,000 12.63%
TOTAL ASSETS 1,066,500 950,000
100.00% 100.00%

LIABILITIES AND CAPITAL

Accounts Payable 151,500 100,000
14.21% 10.53%
Notes Payable 200,000 200,000
18.75% 21.05%
Capital 715,000 650,000
67.04% 68.42%
TOTAL LIABILITIES AND CAPITAL 1,066,500 950,000
100.00% 100.00%
Vertical Analysis
2020 Common
2020 As P1.00
Size

Net Sales 5,000,000 100.00% 1.00

Less: Cost of Goods Sold 3,000,000 60.00% 0.60

Gross Profit 2,000,000 40.00% 0.40

Add: Other Income 200,000 4.00% 0.04

Revenues 2,200,000 44.00% 0.44

Less: Operating expenses 800,000 16.00% 0.16

Net Income before Tax 1,400,000 28.00% 0.28

Less: Income Tax Expense 420,000 8.40% 0.08

Net Income 980,000 19.60% 0.20

Ratio Analysis
Ratio Analysis is a quantitative analysis technique applied by
an entity to be able to assess the company’s liquidity,
solvency, profitability and operational efficiency through
scrutiny of account balances reported in the balance sheet
and income statement
Liquidity Ratios
Liquidity Ratios determine whether an entity can be able to pay for
current liabilities as they become due with the use of current assets.
Current Ratio
Answers the question:
Can the company pay for their current liabilities with current assets?

Formula

Calculation

For both years, the entity’s current assets are larger than current liabilities. The entity
Interpretation can pay for their current liabilities using their current assets since the ratio is greater
than 1.

• CR > 1, entity can pay CL using CA

Remember
• CR = 1, CA = CL
that… • CR < 1, entity cannot pay CL using CA
Acid Test Ratio
Answers the question:
Can the company pay for their current liabilities with quick assets?

Formula

Calculation

For both years, the entity’s quick assets are larger than current liabilities. The entity can
Interpretation
pay for their current liabilities using their quick assets since the ratio is greater than 1.

• ATR > 1, entity can pay CL using QA

Remember
• ATR = 1, QA = CL
that… • ATR < 1, entity cannot pay CL using QA
Cash Ratio
Answers the question:
Can the company’s cash pay for their current liabilities?

Formula

Calculation

For both years, the entity’s current liabilities are larger than cash. The entity cannot pay
Interpretation
for their current liabilities using their total cash since the ratio is less than 1.

• Cash Ratio > 1, entity can pay CL using total cash

Remember
• Cash Ratio = 1, Cash = CL
that… • Cash Ratio < 1, entity cannot pay CL using total cash
Solvency Ratios
Solvency Ratios determine whether an entity has more ownership rather
than debts. It is also called leverage ratios.
Debt Ratio
Answers the question:
How much of the assets are financed by debt?

Formula

Calculation

For 2020, 53.79% of assets are financed by debt. For 2019, 65.03% of assets are
Interpretation financed by debt. In both years, debt is greater than equity since debt ratios are
both higher than 50%.
• When debt ratio is less than 50%, assets are financed more by equity.
Remember • When debt is greater than 50%, assets are financed more by debt.
that… • When both debt and equity is 50%, assets are financed equally by debt and
equity.
Debt to Equity Ratio
Answers the question:
Which has more weight? Debt or equity?

Formula

Calculation

For both years, debt has more weight than equity since both ratios are greater
Interpretation than 1.
• When debt to equity ratio is less than 1, equity has more weight than debt.
• When debt to equity ratio is greater than 1, debt has more weight than equity.
• When debt to equity ratio is equal to 1, debt is equal to equity.
Remember • Rising debt ratio means the company resorts to more debt and more interest
that… expense.
• Falling debt ratio means the company is shifting more to equity financing.
Times Interest Earned Ratio
Answers the question:
How many times can an entity pay for interest expenses with their
operating income?

Formula

Calculation

Interpretation The company’s operating income can cover interest payments for 150 times.

Remember The higher the TIE ratio, the better. It shows how the company is able to meet its
that… interest obligation with the income that it earns/
Efficiency Ratios
Efficiency Ratios measure how well does an entity utilizes their assets
and resources to generate income.
Asset Turnover Ratio
Answers the question:
How many times can an entity generate sales with their total asset
resources?

Formula

Calculation

Interpretation The company’s assets can only generate sales 032 times.

Remember The higher the asset turnover ratio, the better. It shows how the company is able
that… to generate sales from their resources.
Inventory Turnover Ratio
Answers the question:
How many times can an entity sell their inventories and have it replaced
within a period?

Formula

Calculation

Interpretation The company’s inventory turnover is low.

Remember • A lower turnover might mean weal sales and excess inventory.
that… • A high turnover might mean strong sales and insufficient inventory.
Days Sales in Inventory
Answers the question:
How many days does an entity holds on to their inventory before a sales
transaction?

365 days
= 160.79
Inventory Turnover (2.27)
Accounts Receivable Turnover Ratio
Answers the question:
How many times can an entity turn their receivables to cash for a certain
period?

Formula

Calculation

In a period, the company turns receivables into cash 5.20 times over the whole
Interpretation
period.

Remember • A lower turnover signals weak collection efforts.

that… • A high turnover signals strong collection efforts.
Days in Receivables
Answers the question:
How many days does an entity wait for a receivable to become cash?

365 days
= 70.19
AT Turnover (5.20)
Profitability Ratios
Profitability Ratios measure how well does an entity generate income that
relates to their revenues, operating costs, assets and capital.
Gross Profit Ratio
Answers the question:
How much gross profit does the company makes after considering cost of
goods that were sold?

Formula

Calculation

Interpretation 59.23% of sales is the entity’s gross profit.

Remember
Gross profit ratio represents the amount of gross profit for every P1.00 sale.
that…
Return on Assets
Answers the question:
How much income was “returned” in the usage of assets to generate
profit?

Formula

Calculation

Interpretation The entity enjoyed 10.63% returns in the usage of its assets to generate profit.

Remember
The higher the returns, the better.
that…
Return on Equity
Answers the question:
How much income was “returned” in the usage of equity to generate
profit?

Formula

Calculation

Interpretation The entity enjoyed 23.00% returns to the shareholder investments.

Remember
The higher the returns, the better.
that…
 Thank You!
God Bless!
Stay Safe
-Mara Dominique Anne M. Domingo,
MBA