WORKING

CAPITAL
MANAGEMENT
Working Capital Management
Refers to the efficient and effective
utilization of working capital to attain
predetermined objectives of an
organization relative to profitability of
operations, liquidity of financial
resources and minimization of risks
and company costs.
Working Capital Concepts
Is the difference between current assets
and current liabilities.
It is the amount of long term capital that is
made to revolve in conducting operations
and serves as the life blood of a company.

Relevance of Working Capital
A business concern uses working capital in
conducting operations, that is in making goods
and services available to customers and clients
and in paying for operating expenses (salaries,
advertising, rentals).
Working Capital is made to revolve from cash to
inventories and services and then receivables or
directly back to cash. Because this it is called
the lifeblood of an organization.

Analysis of Working Capital
Working capital, because of its relevance in
an organization, requires careful analysis.
This involves looking into its
Appropriate level of Working Capital
Structural Health of Working Capital
Circulation of Working Capital
Liquidity of Working Capital
Appropriate Level of Working
Capital
Refers to the adequacy thereof to enable
a business entity to operate efficiently
towards the attainment of its
predetermined objectives considering the
cost of money involved.
The level or amount of working capital t
which it should be maintained depends
on factors such as:
a. Nature of operations
b. Length of period required to manufacture or
obtain goods.
c. Terms of purchase and sale, gross margin on
sales and operating expenses.
d. Inventory turnover
e. Receivable turnover
f. Seasonal variations
g. Price fluctuations or possible loss from decline in
value of current assets
h. Average number of days in operating cycle
i. Expansion programs
ii. Dividend policies
iii. Taxation
iv. Variation in sales volume
v. Operating efficiency of the business
vi. Credit standing of the company
vii. Competitive Conditions
Inadequate working capital contributes to
business failures because of inability to
promptly pursue company objectives, inability
to take advantage of business opportunities,
inability to avail of cash discounts, higher
product and service costs, reduced sales
volume, loss of customers and poor credit
standing. All these result these result in lower
rate of return on investment and employee
morale.
On the other hand, too much working
capital may result in inefficient use thereof
because it encourages speculation and
unnecessary expansion. There maybe
complacency among management
people inasmuch as they are not under
pressure to carefully plan its allocation
and follow up on its actual usage and
flow.
Adequate working capital enables a
company to pursue its objective promptly,
take advantage of business opportunities,
meet its obligations and conduct
operations smoothly.
Structural Health of Working
Capital
Refers to its composition, that is how much
is in cash, receivables, inventories and
others, and the ability of the business
organization to meet financial
requirements.
Circulation of Working Capital
Refers to the flow thereof from one
current asset item to another in the
process of conducting operations and the
rate of such flow.
Liquidity of Working Capital
Refers to the relative composition thereof
with emphasis on cash and marketable
securities and how soon can the noncash
items among the current assets be
converted into cash.
Financing Requirements of a
Firm
Permanent Financing- Refers to what
should stay with the firm throughout the
budget year.
Seasonal Financing- Refers to additional
requirements arising from seasonal
changes in the level of demand for
products or services during the year.
Total Financing Requirement

Permanent Financing requirement +
Temporary Requirement

=(Fixed Assets + Permanent Current
Assets) + Temporary Current
Assets
Example
The permanent financing requirement of
ABC Corp.is P80,000 consisting of fixed
assets P50,000 and Current assets of
P30,000. Because of seasonal changes in
the demand for its product, the total
current assets for the first, second, third
and fourth quarters of 19B have been
estimated at P38,000, P45,000, P30,000
and P42,000 respectively.



Financing Total Requirement
Strategy
Aggressive Financing Strategy
Operations are conducted on a minimum
amount of working capital. Permanent Capital
requirement is financed by using long-term
sources of funds with seasonal requirements
finance by short term requirements.
Aside from exposing the firm to the risks arising
from a low working capital position, this strategy
puts too much pressure on the firms short term
short term borrowing capacity so that it may
have difficulty in satisfying unexpected needs
for funs.

Total
Requirem
ent
(FA+CA
Long Term
Funds
Short Term
Funds
(1-2)
Working
Capital
(2-FA)
Excess
Working
Capital
(4-CA)
First
Quarter
88,000 80,000 8,000 30,000 -
Second
Quarter
95,000 80,000 15,000 30,000 -
Third
Quarter
80,000 80,000 0 30,000 -
Fourth
Quarter
92,000 80,000 12,000 30,000 -
Conservative Financing Strategy
The long term funds based on the
maximum requirement with unexpected
needs financed by short term sources.
This strategy generally results in more
financing charges.
Total
Requirem
ent
(FA+CA)
Long Term
Funds

Short Term
Funds
(1-2)

Working
Capital
(2-FA)

Excess
Working
Capital
(4-CA)

First
Quarter

88,000 95,000 - 45,000 7000
Second
Quarter

95,000 95,000 - 45,000 0
Third
Quarter

80,000 95,000 - 45,000 15,000
Fourth
Quarter

92,000 95,000 - 45,000 3000
Semi-Aggressive or Semi-Conservative
Strategy
Part of the seasonal financing requirement
is funded using long term sources. Thus,
Long term funds may be equal to the
average between the highest and lowest
total requirement.
Total
Requirem
ent
(FA+CA)

Long Term
Funds

Short Term
Funds
(1-2)

Working
Capital
(2-FA)

Excess
Working
Capital
(4-CA)

First
Quarter
88,000 87,500 500 37,500 -
Second
Quarter
95,000 87,500 7,500 37,500 -
Third
Quarter
80,000 87,500 - 37,500 7,500
Fourth
Quarter
92,000 87,500 4,500 37,500 -
Working Capital and Cash Provided by
Operations
Instead of immediately looking for
additional source of funds from outside a
firm, It would be worth while to determine
how much working capital cash can be
provided by operations.

Operations of a company result in outflows
and inflows of working capital and cash.
When inflows exceeds outflows, the
difference must be working capital or cash
from operations. The income statement of a
business entity includes charges such
as(depreciation and amortization of
intangibles)that do not require outflow of
funds, so that even if the companys
operation result in a net loss, there could still
be a net inflow or working capital or cash.

Example:
AFU Inc. has requested you to determine
its working capital and cash provided by
operations and provides you with the copy
of its income statement showing the
following: