Ortega, Cyrell Apple C.

Sagaya, Ruby Mae M.

Rosillo, Gil Kristopher C.

Satello Motor Corporation

Manufacturing Firm

The company primarily operates on its automotive segment which includes the design, manufacture,
assembly and sale of passenger vehicles, minivans and commercial vehicles, such as trucks and
related parts and accessories.

I. I Introduction

Working capital is near the top of the list among business challenges currently faced by manufacturing
companies. The only issue ranked as a more serious concern — escalating costs — is also directly
related to working capital and cash flow. One accounting description of working capital is expressed
as a financial formula in which net working capital equals current assets minus current liabilities. When
this calculation produces a negative number, a business has negative working capital and should be
alert for near-term cash flow problems. Working capital management by manufacturers and other
businesses is designed to anticipate and resolve such difficulties before they cause normal payments
to be delayed.

I.II Working Capital Management

Working capital is a measurement used to describe the difference between current assets
and current liabilities, in other words assets that are expected to turn into cash in the near
future versus liabilities that require prompt cash payment. The quality of working capital is determined
by the nature of the assets and the length of time required turning those assets into cash. Positive
working capital is necessary for a firm in order to be able to continue its daily operations in terms of
sufficient funds to satisfy short-term debts and upcoming operational expenses.

Working capital management involves planning and controlling current assets and current
liabilities in a manner that eliminates the risk of inability to meet due short term obligations on one hand
and avoiding excessive investment in these assets on the other hand. The main goal of WCM is to reach
and keep an optimized balance between each component of working capital. Business success heavily
depends on the ability of executives to effectively manage receivables, inventory and payables. Firms
can reduce their financing costs and/or increase the firms funds available for expansion projects by
minimizing the amount of investment tied up in current assets. Most financial manager’s time and effort
are allocated in bringing non optimal levels of current assets and liabilities back towards optimal levels.

Efficient working capital management includes planning and controlling of current

liabilities and assets in a way it avoids excessive investments in current assets and
prevents from working with few current assets insufficient to fulfill responsibilities. The
amount of working capital a firm should carry depends on its sales volume, its need for
gross circulating capital relative to its sales volume and the stability of its operations. A
firm’s rate of profit can be increased by economizing on the use of working capital. However, this will
result in increased risks for the firm in terms of short-term financial risks. Firms with stable and
predictable cash receipts, current assets that are marketable, stable in value or short-term and liquid,
or have low amounts of long-term debt can minimize its working capital requirements. On the contrary,
firms with irregular and unpredictable cash flows and cash receipts, slow-moving inventories,
fluctuating market prices, or firms that by the nature of their business are exposed to high credit risks
have higher working capital needs.

Working capital management plays a significant role in determining success or failure of firm in
business performance due to its effect on firm’s profitability as well on liquidity. Business success
depends heavily on the ability of financial managers to effectively manage the components of working
capital. A firm may adopt an aggressive or a conservative working capital management policy to
achieve this goal.

II. Role of Working Capital Management to our Business:

The main focus of working capital management to our firm is as follows:

• The organization of investment of current assets.
• How should the current assets be finance

However, the consideration of investment in current assets should avoid two danger levels:

• Excessive investment in current assets.

• Inadequate investment in current assets.

Excessive investment in current assets should be avoided because it impairs the firms
profitability, as idle investment earns nothing. On the other hand, inadequate amount of working
capital can threaten solvency of the firm.

A typical manufacturing will able to invest its current asset adequately and effectively. Useful and
unbiased recommendations are set out below:

• Buying of raw material: How much investing to order it should be substantial enough for
production requirements.
• Manufacturing the product: What choice of product technology, management strategy
applies have with vivid relationship with subordinates to carry out effective control.

• Collection of Cash. How to collect either by the short term, or long-term borrowing,
suitably, short-term finance. How there are measures improve working capital
management in organizations.
• There should be recruitment of professional and competent quality personnel into the
account department.
• There should be adequate incentive for staff in cash kind. Provision of favorable working
conditions, payment of salaries and allowances regularly to boost their morale.
• There should be proper organization of cash and stock to avoid the problem of half
hazard transactions.
• There should be segregation of division of labour among staff in the department to avoid
conspiracy by staff to defraud the firm.

II.I Management of Working Capital

The financial manger must determine levels and composition of current assets. He must ensure right
sources of finances are sourced to finance current assets. There are many aspects of working capital
management, which makes it an important function of the financial manager.

Some of the aspects are:

Time: Working Capital Management requires much of the financial mangers time.
Investment: Working Capital requires a large portion of the total investment in assets.
Criticality: Working Capital Management has great significance on all firms but it is very critical
for small firms.
Growth: The need for working capital is directly related to the firms growth.
Investment in current assets represents a very significant portion total investment in
assets. Working capital management is critical for all firms, particularly for small firms. A small
firm may not have much investment hi fixed assets, but it has to L in current assets.

There is a direct relationship between a firm‟s growth and its capital needs. As sales
grow, the firm growth needs to invest more in inventories and debtors. These needs become
very frequent and fast when sales grow continuously.

In conclusion, precaution should be taken for the effective and efficient management of
working capital. The finance manager should pay particular attention to the levels of current
assets and financing of current assets. To decide the levels and financing of current asset, the
risk return implication must also be evaluated.

II.II Effect of Excessive and Inadequate Working Capital

Since an organization should maintain a sound working capital, should have an adequate
working capital to run its operation. Excessive working capital means holding cost and idle
funds, which earn no profit for the firm. The dangers of excessive working capital are as follows:
• It results in unnecessary accumulation of inventories. Thus the waste theft and losses
increases.
• It is an indication of defective credit policy and slack collection period consequently,
high incidence of bad debts which adversely affects profits.
Inadequate working capital is also bad arid can lead to the followings:
• It stagnates growth
• It becomes difficult for the firm to undertakes profitable projects for non-availability of
working capital funds.
• It becomes difficult to implement operating plans and achieve the firm‟s profit target.
• Operating inefficiencies creep in when it becomes difficult even to meet day-to-day
commitments.
• Fixed assets are not efficiently utilized for the lark of working capital funds. Thus, the
firms profitability deteriorates

II.III Problems Faced in Working Capital Management

• There is no easy way to determine the exact amount of gross or net working capital for
any firm.
• There is no specific rule as to how current asset should be financed. It is met feasible in
practice to finance current assets by short-term source only.
• There is seasonal change in demand for some manufacturing products.

Cash Conversion Cycle

Annual Sales: 3,000,000

Cost of Goods Sold: 75% of Sales
Purchase: 65% of Cost of Goods Sold
Average age of inventory(AAI) : 60 Days
Average Collection period (ACP) : 30 Days
Average Payment period (APP) : 20 Days
Average Inventories:370,000
Operating cycle(OC)

OC= AAI + ACP

= 60 days + 30 days
OC= 90 days

Cash Conversion Cycle(CCC)

CCC= AAI + ACP - APP

= 60 days + 30 days - 20 days
CCC = 70 days

Our company’s operating cycle is 90 days, and its cash conversion cycle is 70 days.

The resources of our company in this cash conversion cycle are(assuming a 365-day a year) are

Inventory =(3,000,000x0.75)x(60/365) = 369,863

+Account Receivable =(3,000,000x30/365) = 246,575
-Account Payable =(3,000,000x0.75x0.65)x(20/365) = 80,137
=Resources invested = 536,301

Inventory Turnover = Cost of goods sold

Average Inventories
=3,000,000x0.75
370,000
=2,250,000
370,000
Inventory turnover =6.08
Background
type of business
working capital mgt techniques
how will we apply icm to business
WCM—AR mgt, CCC, Receipt and disbursement mgt., inventories