Working Capital
Working Capital
Working Capital
Basic Concepts
Working Capital
Management -
DEFINITION
• Management of current assets and
liabilities
• To achieve a balance between
profitability and risk that
contributes positively to the firm’s
value.
Working Capital CURRENT ASSETS are the least profitable assets of the
Management - company.
• Investment in working capital involves lower return.
DEFINITION • The lower the return, the lower the risk
• Lower default risk
• Investment in working capital more has given the
company a greater liquidity.
• PROFITABILITY is INVERSELY related to LIQUIDITY.
The length of time in which the firm purchase
inventories, sell it and receive cash from sale.
Purchase of Sell Collecting
Inventories Inventories Cash
OPERATING
Period or Age of Inventory Age of Receivables
CYCLE
Operating Cycle
CONVERSION
CASH CONVERSION CYCLE
Period or Age of Payables
CYCLE
Operating Cycle
Cash Payment
CONVERSION NOTE: Cash Conversion cycle is the basis for how much
CYCLE the company should invest in working capital.
ILLUSTRATION
APR. 1 – Purchased inventories on account, P20,000.
CASH
APR. 4 – Sold inventories on account, P25,000.
APR. 6 – Paid the purchases on account
CONVERSION APR. 10 – Collected cash from sales on account
Increase Days
Accounts Payable
Working Investment
Policy
Financing
Policy
Capital Policy
Where the
Where to
finances
invest?
came from?
Type of Conservativ
Aggressive
Policy e