Post on 02-Jun-2018
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CHAPTER V
MANAGEMENT OF WORKING CAPITAL
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NATURE OF WORKING CAPITAL
Working capital is defined as the total firms
investment in current assets used in its day-to-day
operations. Some refer to it as a revolving capital oroperating assets.
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Rationale for the need of working capital
are:
Enable the firm to settle all its maturing obligationson time
Be able to defray all expenses incurred in the
business operations such as salaries, utilities,
rentals, insurance premia, taxes, etc. To replenish inventories within the time frame
To support its credit sales and
Provide for any possible contingencies or
opportunities for investment.
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Factors affecting the required amount of
working capital
The firms term of purchase and sale A firm that purchases its inventories on credit will require a
small amount of working capital
If inventories are acquired on cash basis, a bigger working
capital will be needed The turnover of merchandise inventory
A firm that produces goods that are fast moving item orsaleable ones do not need a bigger working capital
A firm producing slow moving items may require a bigger
working capital Volume of goods on hand to satisfy customers demand
A firm that maintains safety stocks needs a bigger workingcapital than that which do not maintain such stocks
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Factors affecting the required amount of
working capital
The type of business activity A business that requires a big investment in inventories
(manufacturing) requires a much bigger working capital to beable to maintain the needed volume of inventories
Firm like merchandising needs smaller working capital
The turnover of its receivables Collection of receivables within a short period of time means
cash inflows in short period of time thus requiring smallerworking capital
Firm that allows a longer period for the payment of sales oncredit will require a bigger working capital as a support to the
receivables Business influenced by business cycles
A firm that is influenced by the ups and downs of businesscycles, is going to need a bigger working capital, for a certainperiod determined by the firm, production must be increasedthus a need for bigger working capital
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Management of cash
Cash is the most liquid yet the least productive
assets.
It enables payment of obligations when due but
lessens productivity when it is hoarded.
Strategies in cash management are formulated
aiming at two important goals:
1) to make cash available when needed to meet the firms
payments
2) to maintain the least amount of idle cash being held by
the firm.
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There are two assets being regarded as liquid asset:
Cash- is composed of bills and coins that the firmholds in its possession.
Near Cash - its ability to be easily converted into cash
like marketable securities.
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Three reasons for holding cash
To maintain a state of solvency
Solvency is the degree to which the current assets of an
individual or entity exceed the current liabilities of that individualor entity.
ability of a corporation to meet its long-term fixed expenses and
to accomplish long-term expansion and growth
As a precautionary motive
In order to patch up contingencies that are beyond human
control
As a speculative motive
Profit making opportunity for a business firm
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Strategies in cash management
A good financial management involves efficientmanagement of cash. This could be attained byaccelerating cash collections and decelerating cash
disbursements.Accelerating cash collection:
Cash discounts
Concentration banking
Synchronizing cash inflows and cash outflow
Collection from Post dated checks
ATM
Decelerating Cash Disbursement: Stretching payables through PN
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Management of receivables
Receivables are created when a firm sells its productand/or service on credit in the use of credit cards andpurchase orders.
The more credit sales the firm has, the bigger receivablesbe determined as a result of credit sales
With credit policies the granting of credit to its customerswill be subject to existing companys policies: Terms of salesrefers to the time period in which buyers must
pay and the terms of the sale.
Type of customers
Collection procedures Credit standard- a measure of determining those who will be
extended credit facilities or not
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Consequences to credit sales
The consequence of credit is that the capital of
the firm is transformed into an investment in the form
of accounts receivable. When the greater portion of
its sales are on credit, mounting account receivablesas a consequence may create a problem of how
much needed capital should be made available to
support such an accumulation of receivables
originating form credit sales.
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Inventory management
it is necessary in controlling the assets being
produced and sold. At the same time the company
can minimize entailing the cost of producing andmaintaining said goods in its normal course of
operations. The assets that are referred to here are
the raw materials, goods in process, finished goods
and spare parts.