WORKING CAPITAL

By :
MUNAWARAH, S.E., M.Si
Financial Management Function

There are basically 2 main functions related to the

decision to maximize the company:
1.Invesment Decisions
2.Funding Decisions
 DEFENITION
Paying
Employee
Salaries

Paying Labor
Working Wages
Capital
Paying Debt

Etc..
Factors that influence working capital
requirements

• Sales Volume
• The size of the company scale
• Company Activities
• Technological development
• The company's attitude towards liquidity
and profitability
The targets to be achieved from working capital
management:
•Maximizing firm value by managing current assets so that
the marginal rate of return on investment is equal to or
greater than the cost of capital used to finance these
assets.
•Minimizing the cost of capital used to finance current
assets.
•Supervision of the flow of funds in current assets and the
availability of funds from debt sources, so that the company
can always meet its financial obligations when they fall due.
 Working Capital Concept:
1. Quantitative Concepts
(Gross Working Capital)

Working Capital is the total amount of

current assets.
Formula :

Working Capital = Total Current Assets

2. Qualitative Concepts
(Net Working Capital)

Working Capital is the excess of current

assets is used to finance the company's
operations without disturbing its liquidity.

Formula :
Working Capital = Total Current Assets – Total Current
Liability
3. Functional Concepts

Working Capital is related to the function of

funds in generating income. This capital is
divided into working capital from current
assets, part of potential current assets, and
fixed assets
Formula :

Working Capital = Total Current Assets + Total

Potential Current Asstes + Total Fixed Assets
Example:
ABC Company
Balance Sheet
For the Year ended 31st Dec 2015 (in 000 rupiahs)
Current Assets : Current Liability :
Cash 24.000 Account Payable 36.000
Marketable Securities 56.000 Notes Payable 60.000
Account Receivable 80.000 Tax Payable 29.000
Inventory 100.000 Total Current Liability 125.000
Total Current Assets 260.000
Non current Liability:
Fixed Assets : Bonds 200.000
Land 150.000
Building 300.000 Equity :
Machine 250.000 Capital Stock 425.000
Total Fixed Assets 700.000 Retained Earning 210.000

Total Assets 960.000 Total Liablitiy+ Equity 960.000

• Information :
1.Depreciation every year for :
- Building Rp 60.000.000
- Machine Rp 35.000.000

2. Credit sales with a profit margin of 20%

Determine the amount of working capital per

each concept!
Answer :
1. Quantitative Concept :
Working Capital = Total Current Assets
= Rp 260.000.000

2. Qualitative Concept :
Working Capital = Total Current Assets – Total Current
Liability
= Rp 260.000.000 – Rp
125.000.000
= Rp 135.000.00
3. Functional Concept
Working Capital :
Cash 24.000.000
A/R (80%) 64.000.000
Inventory 100.000.000
Acc. Depp of Building 60.000.000
Acc. Depp of Machine 35.000.000
Total Rp 283.000.000

Potential Working Capital :

Marketable Securities 56.000.000
Profit Margin (20%)16.000.000
Total Rp 72.000.000
Non Potential working capital :
Land 150.000.000
Building 240.000.000
Machine 215.000.000
Total 605.000.000
 REMEMBER.....!!!
• Working capital is said to be optimal if it is able to
consider financial ratios, liquidity and profitability.
As well as the level of risk arising from the
implementation of working capital policies.

Liquidity---- Profitability----- Risk

 Working Capital Policy

1. Conservative Policy
Proportion for fulfillment of funds:
Long term debt > short term debt.

Goal:
Minimizing risk, although it will also reduce
expected profit
(risk , profit )
2. Aggressive Policy
Proportion for fulfillment of funds:
Short term debt > long term debt.

- Goal :
Get the highest profit (profit) even though
the risk is also high
(risk , profit )
3. Moderate Policy
-Proportion for fulfillment of funds:
In accordance with the matching principle. For
example, to finance short-term assets financed
by short-term funds. And vice versa.

– Goal :
Maintain sufficient risk stability and profitability
 Example:
• Merdeka company is a company engaged in the
trading industry. In 2020 the company plans to
determine the maximum level of current assets. The
company data are as follows:
1. The sales projection for 2020 will increase to IDR
70,000,000.
2. Debt ratio is maintained at 50%
3. Fixed assets IDR 20,000,000
4. Operating profit 20% of sales
5. The loan interest rate is estimated at 17%
6. tax rate is 25%
Financial managers consider 3 alternative
working capital policies, namely:
1. Conservative policy by setting the amount
of current assets 55% of sales.
2. Moderate policy by setting the amount of
current assets at 50% of sales
3. Aggressive policy by setting the amount
of current assets at 40% of sales.
Answer

Description Alternative working capital policies

Konservatif Moderate Agresif

Sales 70.000.000 70.000.000 70.000.000

Fix Asset 20.000.000 20.000.000 20.000.000
Current Assets 38.500.000 35.000.000 28.000.000
Total asets 58.500.000 55.000.000 48.000.000
Current Debt 29.250.000 27.500.000 24.000.000
Equity 29.250.000 27.500.000 24.000.000
Operating Profit (EBIT) 14.000.000 14.000.000 14.000.000
Interest expense (17%) 4.972.500 4.675.000 4.080.000
Earning Before Tax (EBT) 9.027.500 9.325.000 9.920.000
Tax (25%) 2.265.875 2.331.250 2.480.000
Net Profit (EAT) 6.770.625 6.993.750 7.440.000
Profitability (ROE) 23,15 % 25,43 % 31,00 %
Likuidity (current ratio) 131,62 % 127,12 % 116,67 %
From the calculation results, it can be
seen that aggressive policies will
provide a high level of profitability
compared to the other two policies.
However, it is inversely proportional to
its low liquidity
 CONCLUSION

1. Working capital policy is very dependent on the type or

characteristics of the manager and the type of company.
2. The ability to earn company profits is inversely related to
liquidity
3. The ability to earn a profit moves in the direction of risk.

Therefore, optimal working capital is largely determined

by management's attitude towards the "trade off"
between the ability to earn profits and risk
 Exercise 1

Cipta Karya Company in 2016 has the following assets structure :

Current Asset:
Cash Rp 2.880.000
Marketable securities Rp 2.400.000
A/R Rp 1.920.000
Inventory Rp 1.200.000
Total Current Assets Rp 8.400.000

Fixed Assets :
Land Rp 1.200.000
Building Rp 5.760.000
Machine & Equipment Rp 3.840.000
Total Fixed Asset Rp10.800.000

Total Assets Rp 19.200.000

Current Liability :
A/P Rp 1.500.000
Notes Payable Rp 2.400.000
Tax Payable Rp 1.400.000
Total Rp 5.300.000

Non Current Liability:

Bonds Rp 4.450.000

Equity :
Capital Stock Rp 5.553.000
Retained earning Rp 3.897.000

Total Pasiva Rp 19.200.000

Determine the working capital :

a. Quantitative concept
b. Qualitative concept
 Exercise 2

Chairman of PT. Karona predicts that in 2021 there will be a significant

increase in product demand. Then the company management takes the
optimal working capital policy action. Management estimates that sales
increased by IDR 250 million, and the company wants to maintain a debt-to-
total assets ratio of 50%. And currently the fixed asset value is Rp 120
million. The interest rate on debt is 16%. The company's financial manager is
analyzing three alternative working capital policies, namely:
1. Conservative policy by setting the amount of current assets at 60% of sales.
2. Moderate policy is to set the amount of current assets at 50% of sales.
3. Aggressive policy by setting the amount of current assets at 40% of sales.
Question :
a. Calculate the profitability and liquidity ratios for the
three working capital policy alternatives with the
assumption that operating profit is 15% of sales and
company tax is 25%.
b. Which policy is the best in your opinion? Explain !
THE END.....