Lesson 3.
4
Working Capital
Management
Business Finance
Accountancy, Business, and Management
1
Working adults struggle to
balance work and social life
in addition to household
budgeting. Some face
financial challenges.
2
Most adults
think applying
for a loan can
lighten the
burden.
3
Although a loan can help, it
can also be dangerous if
borrowers do not manage
their personal finance well.
4
Is the cycle of borrowing,
financing, and payment healthy
for a company? Should debts be
avoided altogether?
5
Working Capital Management
It would be difficult to imagine what a company can become
five to ten years from now if it does not maintain a good
performance at present.
6
Working Capital Management
● a tool designed to ensure that a company efficiently uses
current assets and liabilities
● monitors and maintains adequate cash flow to meet short-
term obligations
7
Working Capital Management
Working Capital
Management
Guarantees
enough current
assets for Secures financing
operations
8
Working Capital Management
Working Capital Management involves managing the current assets and
current liabilities.
9
Working Capital Management
Calculating the Working Capital
Working Capital = Current Assets – Current Liabilities
10
Working Capital Management
Importance
1. It ensures the company possesses appropriate
resources for its daily operations.
2. It helps the company to maintain flawless operations.
3. It enables the company to improve its profitability.
11
Working Capital Management
Importance
4. It guides the company in maintaining the balance
between its current assets and liabilities.
4. It helps the company to cover financial obligations and
boost its earnings.
12
Management of Working Capital Accounts
Cash Management
● maintains the company's
competency in handling cash
inflow and outflow
● tool: cash flow schedule
13
Management of Working Capital Accounts
Cash Management
Objectives:
1. To make payment based on
the payment schedule
2. To minimize cash balance
14
Management of Working Capital Accounts
Accounts Receivable
Management
● involves the company's
credit standards and policies
● tool:
○ collection ratio
○ 5Cs
15
Management of Working Capital Accounts
Accounts Receivable
Management
● ability to repay loans Capacity
● assessment of debt-to-
income (DTI) ratio
16
Management of Working Capital Accounts
Accounts Receivable
Management
Looks into the borrower’s:
Capital
● Investment
● Savings
● Assets
17
Management of Working Capital Accounts
Accounts Receivable
Management
Looks into the borrower’s:
Collateral
● Property or Land
● Equipment
● Vehicle
18
Management of Working Capital Accounts
Accounts Receivable
Management
Looks into the borrower’s: Condition
● Loan’s interest rate
● Purpose of loan
19
Management of Working Capital Accounts
Accounts Receivable
Management
Looks into the borrower’s:
● Educational background Character
● Credit history
● Affiliations
● Creditworthiness
20
Credit Score
Credit card companies use credit scoring to give an overall
rating on a borrower’s history and capacity to pay debts. They
do this to manage their account receivables.
21
Credit Score
The percentage of credit limit, payment delinquencies,
foreclosures, and bankruptcies can affect the credit score of a
client. Depending on a borrower’s credit score, the credit card
company can either increase or decrease the client’s credit
limit.
22
Management of Working Capital Accounts
Inventory Management
ensures a sufficient supply of
materials and prevents
shortages
23
Management of Working Capital Accounts
Finished products
Raw materials
Components of
Inventory
Management
Work-in-process Stores and spares
24
Components of Inventory
Raw materials
goods or materials needed
to complete a product
Rolls of Fabric
25
Components of Inventory
Work-in-process
● semi-finished products
● goods need to undergo
some process to become
finished products
Shop Factory
26
Components of Inventory
Finished products
manufactured goods ready
for sale
Fashion Store
27
Components of Inventory
Stores and spares
materials that maintain the
proper condition of
machinery and storing
goods
Warehouse
28
Management of Working Capital Accounts
Current Liabilities
Management
● managing of accounts
payable
● financing through short-
term debt
29
Working Capital Financing Policies
Working Capital
Financing
Policies
Conservative Policy Aggressive Policy Hedging Policy
30
Working Capital Financing Policies
Conservative Policy
least risky method, low
profitability
31
Working Capital Financing Policies
Conservative Policy
utilizes long-term financing
to cover permanent
working capital and
fluctuating current assets
32
Working Capital Financing Policies
Aggressive Policy
risky method but has the
highest chance for
profitability
33
Working Capital Financing Policies
Aggressive Policy
The permanent working
capital and fluctuating
current assets are
financed through short-
term financing.
34
Working Capital Financing Policies
Hedging Policy
also known as matching
policy
35
Working Capital Financing Policies
Hedging Policy
● finances permanent
current assets through
long-term financing
● the fluctuating current
assets are financed
through short-term
financing
36
Keep in Mind
● Working capital management monitors and maintains various
accounts to ensure adequate cash flow to meet short-term
obligations. Since current assets tend to fluctuate, working capital
management also involves the methods and policies in capital
financing.
37
Keep in Mind
● Working capital is computed by getting the difference between
current assets and current liabilities:
Working Capital = Current Assets – Current Liabilities
38
Keep in Mind
● Working capital management specifically looks into the current
assets and current liabilities accounts.
39
Keep in Mind
● There are three methods of working capital financing policy:
conservative, aggressive, and hedging. These methods are
differentiated by the extent of long-term and short-term financing
plans of a business.
40