Lesson Plan on Working Capital Management

I. Working Capital (or net working capital) - excess of current assets over current liabilities.
Investment in working capital consists of cash, marketable securities, accounts receivable and
inventories as well as current liabilities.

Net Working Capital = Current Assets – Current Liabilities

Current Assets - defined as assets turning over within one year or the production cycle whichever is longer. These
are classified into two types:

1. Permanent Current Assets – represent the minimum required level of current assets needed to support the
firm’s operations. Due to seasonality, this is measured at the lowest point of its operating cycle.

2. Temporary Current Assets – by its nature, the amounts of these assets fluctuate as the asset amounts
needed to support these levels vary as well.

Current Liabilities – defined as liabilities to be paid within one year or the production cycle whichever is longer.

Principle behind Working Capital Management

It involves the determination of the level, quality and maturity of each major current
asset and current liability as well as the administration and control of current assets and current
liabilities to ensure that they are adequate and used effectively for business purposes.

Sources of Working Capital

1. Profitable operations (net of working capital used in operations)

2. Sale of non-current assets
3. Long-term borrowing
4. Investments for owners

Clue: Working Capital (dr)

Non-Working Capital (cr)

Uses of Working Capital

1. Operations (deducted from sources of working capital)

2. Purchase of non-current assets
3. Retirement or payment of long-term debt
4. Return of capital to owners through dividend payments (excluding stock dividends), retirement of capital stock or
withdrawals

Clue: Non-working Capital (dr)

Working Capital (cr)