Working Capital

Management
 - Maturity-matching
working capital
financing policy
Working Capital Management is the
- Aggressive working administration and control of the company’s
capital financing policy working capital. The primary objective is to
achieve a balance between profitability and risk.
- Conservative working
capital financing policy
Cash
Being the most liquid asset, cash is an
important account in the balance sheet that
will affect the liquidity, and solvency of a
company. It is also the most vulnerable when
it comes to theft.
 The following are the reasons for holding cash:
- Primary Reasons
a. Transactional. This is the cash used for
paying expenses such as salaries, utilities,
Motives For rent and taxes, among others.
Holding Cash b. Compensating balance. This is the cash held
to meet bank requirements such as the
minimum cash balance you maintain for
checking accounts and if you have existing
loans, banks may also require a minimum
amount of deposit with them.
- Secondary Reasons
a. Precautionary. This is the cash maintained
for emergencies such as the additional cash
you keep during political and economic
uncertainties.
b. Speculative. This refers to the cash held by
the company to take advantage of
opportunities .
 - The cash budget provides information
regarding the company’s expected cash
receipts and disbursements over a given period.
The Cash - It is useful for identifying future funding
requirements or excess cash within a given
Budget period. This allows managers to find possible
sources of financing if the cash budget shows
cash shortage or identify appropriate tenors for
money market placements for excess cash
- Cash Receipts include all of a firm’s inflows of
cash in a given financial period. The most
common components of cash receipts are cash
sales, collections of accounts receivable, and
other cash receipts.
- Cash Disbursements include all outlays of cash by the
firm during a given financial period. The most common
cash disbursements are:
• Cash purchases
• Purchasing fixed assets
• Payments of accounts payable
• Interest payments
• Rent (and lease) payments
• Cash dividend payments
• Wages and salaries
• Principal payments (loans)
• Tax
 • Accounts receivables spring out of the need to
sell merchandise.
Accounts • An excellent business proposition is to
Receivable generate sales without offering a credit facility
to customers. However, this concept is
theoretically sound, but not sustainable.
• Credit management strategically defines the
quality of account receivables collection.
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. Credit policies are an
integral part of the credit evaluation and
there are 5C’s used in credit evaluation.
These are:
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
Capital – a customer’s financial resources
Condition – current economic or business
conditions
• Proper management of accounts receivable entails
having a good billing and collection system.
- A good system should lead to the sending of
statements of account to customers on time.
- Follow-ups through phone calls or any form of gentle
reminders should be made if customers fail to pay on
time. These follow-ups can also serve as the
management’s way of validating if the contact details
given by customers are still valid and if the customers
still occupy the same office.
Note: Accounts which have been past due for
more than 90 days have higher probability to
default. The aging of receivables is useful in
determining the allowance for doubtful
accounts.
 • Inventory management involves the formulation
and administration of plans and policies to
efficiently and satisfactorily meet production and
merchandising requirements and minimize costs
INVENTORY relative to inventories.
MANAGEMENT - Effective inventory management becomes critical
when the nature of the products are either
perishable (e.g. fruits, vegetables), fragile (e.g.
glasses), or toxic (e.g. bleaching agent).
• Proper inventory management involves the
determination of reasonable levels of inventories
considering the size and nature of business.
- Maintaining too much inventories has costs such as
carrying or holding costs, possible obsolescence or
spoilage.
- On the other hand, too low inventory can result to
stockout, and eventually lost sales.
• In a manufacturing company, there are three types
of inventory:
- Raw materials – these are purchased materials not
yet put into production.
- Work in process – these are goods and labor put
into production but not yet finished.
- Finished goods – these are goods put into
production and finished. These are ready to be
sold.
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