WORKING CAPITAL AND CASH MANAGEMENT

Working Capital

Working capital is the difference between the firm’s current assets and
current liabilities. It is used as a measure to check the liquidity of the
firm . If the firm’s current assets are greater than the current liabilities, it is
capable of paying its current obligations. Hence, if current assets are less
than the current liabilities, then the firm cannot pay its current obligations
and has to resort to borrowings. Current assets comprise cash, accounts
receivable, marketable securities , inventory and prepaid assets. The
current liabilities are the short-term obligations that are expected to
mature within one year. Managing the movement of working capital
ensures the continuity of company operations.
Having a well-planned working capital, the company can take advantage
of business opportunities to achieve its goal promptly and meet its
financial obligations. Optimizing the use of working capital prevents
excessive investments. Having an excessive working capital has a
negative impact on the profitability and liquidity of the company due to
various factors associated with it.

The Working Capital:

Current assets
Cash and cash equivalents Php xxx
Accounts receivable xxx
Marketable securities of
Short-term investment xxx
Inventory xxx
Prepaid assets xxx
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Total Current Assets Php xxx
Current Liabilities
Accounts payable xxx
Notes payable-short term xxx
Accrued expense payable xxx
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Total Current Liabilities xxx
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WORKING CAPITAL Php xxx
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WORKING CAPITAL MANAGEMENT

Working Capital Management is concerned with the efficient and effective

utilization of working capital to attain the predetermined objectives of the
company relative to profitability of operations, liquidity of financial
resources , and minimization of risks and company costs. It is also
pertinent to the administration and control of working capital to ensure that
it is adequate and effectively utilized.

Working capital management regulates various types of current assets and

current liabilities . It requires decisions on how the current assets will
be financed and utilized. Managing current liabilities , on the other hand ,
implies maximizing the company’s holding period before the firm finally
pays off its obligations.

The top management determines how much investment should be made

in current assets. The investment may change from time to time and
requires close monitoring of the current balances. Current assets are not
properly managed if funds are tied up in one or several assets that do not
provide any return when in fact, it could be more productive and
beneficial to the firm if placed somewhere else (Shim&Siegel, 2006).

The goal of management is to maintain a cash level at a minimum without

putting the company at risk, thus maintaining a level of cash that is enough
to support the firm’s operations. Maintaining too much cash is hazardous
to the company. As the most liquid among the assets, cash is susceptible
to theft. A good finance manager would not allow such an occurrence
because of the risk involved. Any excess cash should be placed in other
investment opportunities like time deposit , mutual funds, bonds, and
capital investments. Paying off the company’s obligations would also be
another option to prevent paying for more interest. The management
must be fully aware that having excess cash does not contribute to the
firm’s profitability because of the opportunity income attributable to cash.

In managing accounts receivable, the company does not want to be too lax
nor too strict in granting credits. Being too lenient would result in accounts
receivable increases and bad debts. On the other hand, being too stiff on
credit would reduce the accounts receivable at the expense of a decrease
in sales. With opposing ideas on being too lenient or too stiff on granting
credit, the company must find a way that would result in well-managed
accounts receivable in terms of collectability and the viability of
extending credit sales.

In managing inventories, investing in excessive stocking levels may

result in obsolescence and losses. Maintaining inventories at a level
enough to support the market demand means a lot of cost savings in
terms of warehousing, insurance, and manpower, among others.

Current liabilities are short-term obligations incurred by the firm to support

operating activities. These may take the following forms: accounts
payable, notes payable, accrued expenses, interest expense, salaries
expense and other conceivable expenses that are expected to be paid in
one year. In handling the current liabilities, the firm has to be prudent in
making use of time before it finally pays off its obligations. Its prime
responsibility is to hold on to current obligations that can be easily
handled by its current assets. To a certain extent, current liabilities are
sometimes held even after their maturity date. However, this kind of
practice may put the firm in a situation where its credit rating performance
becomes detrimental.