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Alternative Instructional Module

BUSINESS FINANCE
Quarter 1 – Module 4:
Planning and Working Capital
Management II

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BUSINESS FINANCE
Alternative Instructional Module
Quarter 1 – Module 3: Planning and Working Capital Management II
First Edition, 2020

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 12
BUSINESS
FINANCE
Quarter 1 – Module 4:
Planning and Working Capital
Management II
Introductory Message
For the facilitator:
Welcome to the Business Finance Alternative Delivery Mode (ADM) Module
on Planning and Working Capital Management II!

This module was collaboratively designed, developed and reviewed by

educators both from public and private institutions to assist you, the
teacher or facilitator in helping the learners meet the standards set by the K
to 12 Curriculum while overcoming their personal, social, and economic
constraints in schooling.

This learning resource hopes to engage the learners into guided and
independent learning activities at their own pace and time. Furthermore,
this also aims to help learners acquire the needed 21st century skills while
taking into consideration their needs and circumstances.

In addition to the material in the main text, you will also see this box in the
body of the module:

Notes to the Teacher

This contains helpful tips or strategies
that will help you in guiding the learners.

As a facilitator you are expected to orient the learners on how to use this
module. You also need to keep track of the learners' progress while allowing
them to manage their own learning. Furthermore, you are expected to
encourage and assist the learners as they do the tasks included in the
module.
For the learner:

Welcome to the Business Finance Alternative Delivery Mode (ADM) Module

on Planning and Working Capital Management II!

The hand is one of the most symbolized part of the human body. It is often
used to depict skill, action and purpose. Through our hands we may learn,
create and accomplish. Hence, the hand in this learning resource signifies
that you as a learner is capable and empowered to successfully achieve the
relevant competencies and skills at your own pace and time. Your academic
success lies in your own hands!

This module was designed to provide you with fun and meaningful
opportunities for guided and independent learning at your own pace and
time. You will be enabled to process the contents of the learning resource
while being an active learner.

This module has the following parts and corresponding icons:

What I Need to This will give you an idea of the skills or

Know competencies you are expected to learn
in the module.

What I Know This part includes an activity that aims

to check what you already know about
the lesson to take. If you get all the
answers correct (100%), you may decide
to skip this module.

What’s In This is a brief drill or review to help you

link the current lesson with the previous
one.

What’s New In this portion, the new lesson will be

introduced to you in various ways such
as a story, a song, a poem, a problem
opener, an activity or a situation.

What is It This section provides a brief discussion

of the lesson. This aims to help you
discover and understand new concepts
and skills.

What’s More This comprises activities for independent

practice to solidify your understanding
and skills of the topic. You may check
 the answers to the exercises using the
Answer Key at the end of the module.
What I Have This includes questions or blank
Learned
sentence/paragraph to be filled into
process what you learned from the
lesson.

What I Can Do This section provides an activity which

will help you transfer your new
knowledge or skill into real life
situations or concerns.

Assessment This is a task which aims to evaluate

your level of mastery in achieving the
learning competency.
Additional In this portion, another activity will be
Activities given to you to enrich your knowledge or
skill of the lesson learned. This also
tends retention of learned concepts.

Answer Key This contains answers to all activities in

the module.

At the end of this module you will also find:

References This is a list of all sources used in

developing this module.

The following are some reminders in using this module:

1. Use the module with care. Do not put unnecessary mark/s on any
part of the module. Use a separate sheet of paper in answering the
exercises.
2. Don’t forget to answer What I Know before moving on to the other
activities included in the module.
3. Read the instruction carefully before doing each task.
4. Observe honesty and integrity in doing the tasks and checking your
answers.
5. Finish the task at hand before proceeding to the next.
6. Return this module to your teacher/facilitator once you are through
with it.
If you encounter any difficulty in answering the tasks in this module, do
not hesitate to consult your teacher or facilitator. Always bear in mind
that you are not alone.

We hope that through this material, you will experience meaningful

learning and gain deep understanding of the relevant competencies. You
can do it!
 What I Need To Know

This module was designed and written with you in mind. It is here to help
you master planning and working capital management. The scope of this
module permits it to be used in many different learning situations. The
language used recognizes the diverse vocabulary level of students. The
lessons are arranged to follow the standard sequence of the course.

This module has one lesson:

 Planning and Working Capital Management II

The most essential learning competencies are as follows:

1. Illustrate the formula and format for the preparation of budgeted

financial statement.

2. Explain the tools in managing cash, receivable and Inventory.

After going through this module, you are expected to:

1. Indentity financial statements,

2. describe the formula and format of budgeted fiancial statement,
3. apply the tools in planning and forcasting,
4. describe cash, receiavable and inventory,
5. identify the basic tools in cash, receivable and inventory
management, and
6. apply the tools in cash, receivable and inventory management.
 What I Know

Read the following questions carefully and choose the letter of the correct
answer. Write your answer in your test notebook.

1. Which type of inventory consists of all items currently in the production

process?
a. raw materials
b. work-in-process
c. finished goods
d. Capital goods

2. Which type of inventory consists of items that have been produced but
not yet sold?
a. raw materials
b. work-in-process
c. finished goods
d. capital goods

3. Which is not a basic type of inventory?

a. raw materials
b. work-in-process
c. finished goods
d. capital goods

4. Which inventory contains the basic components of the production

process?
a. raw materials
b. work-in-process
c. finished goods
d. capital goods

5. Which is the amount of assets the applicant has available for use in
securing the credit?
a. character
b. capacity
c. capital
d. collateral
6. Which statement contains the company planned inflows and outflow of
cash?
a. Cash budget
b. Cash flow
c. Profit and Loss
d. cash distribution plan

7. What is the sum of number of days of inventory and the number of days
of account receivable?
a. accounting cycle
b. operating cycle
c. accounting period
d. inventory turnover

8. Which is not a working capital financing policy?

a. aggressive working capital policy
b. maturity-matching working capital policy
c. conservative working capital policy
d. Permanent working capital policy

9. Which is not a primary and secondary reason for holding cash?

a. transactional
b. compensation
c. precautionary
d. speculative

10. Which is not a five C’s of credit?

a. Character
b. Capacity
c. Collateral
d. Capital
e. Customer

Lesson Planning and Working Capital

What’s In Management II
Activity 1
Prepare your weekly cash budget by estimating the amount of allowance and
disbursement for next week. Do this in your test notebook.

Name :____________________________
Learners Cash Budget
Period :__________________________
Amount

Weekly Allowance XX
Other source of cash XX
Total Allowance (a) XX
Less: Payments
Food XX
Fare XX
Load XX
Supplies XX
Others XX
Total Payment (b) XX
Net Cash Flow for the Period (a-b) XX
Add: Cash balance, Beginning (from last week) XX
=Cash balance , Ending XX
Cumulative Excess (Fund Requirement) XX

What’s New

Activity 2
 Download a sample comparative financial statement of any company and do
the following. (Note minimum of two years comparative). Do this in your test
notebook.

1. Make an interpretation on the company status particularly on profitability

and stability of the company.
2. Determine the trend for the following:
a. Sales
b. Net income
c. Total Assets
d. Total Liability
e. Total equity

Excellent Very Satisfactory Satisfactory Needs Points

(4 pts.) (3 pts.) (2 pts.) Improvement
(1 pt.)
Earned
1. Demonstrates Demonstrates Demonstrates Demonstrates
Understandi thorough considerable some limited
ng understanding of understanding of understanding of understanding of
Information topic or theme. topic or theme. topic or theme. topic or theme.
and Ideas
2. Clarity Communicates Communicates Communicates ideas Communicates
ideas with a high ideas with with some clarity. ideas with
degree of clarity. considerable limited clarity.
clarity.

Process Questions:
1. How did you find the cash budget activity? Are you using them in
your daily life as a learner?
2. Are you familiar with the items in the financial statement?
3. Can you interpret the financial statement like a pro?
 What is It

Read the following concepts for you to gain better understanding of planning
and working capital management.

Operation Budget

Operations budget refers to the variable and fixed costs needed to operate
the company but are not clearly attributable to the generation of income.

Examples of this are the following:

• Rent payments
• Wages and Salaries of selling and administrative personnel
• Administrative Costs
• Travel and representation expenses
• Professional fees
• Interest Payments
• Tax Payments

Cash Budget

It is a statement of the firm’s planned inflows and outflows of cash. It is

used by the firm to estimate its short-term cash requirements, with
attention being paid to planning for surplus cash and for cash shortages.
The cash budget forecasts the timing of these cash outflows and matches
them with cash inflows from sales and other receipts. For a business
enterprise, having the right amount of cash is important since cash is used
to make payments for purchases, for operational expenses, to creditors, and
for other transactions. - The cash budget is also a control tool to monitor the
way the company handles cash.

January February March April Total

Collection:
From Customer XX XX XX XX XX
Other Income XX XX XX XX XX
Total Collection (a) XX XX XX XX XX
Less: Payments
Purchases XX XX XX XX XX
Cash Operating XX XX XX XX XX
Expenses
Income taxes XX XX XX XX XX
Loan Payment XX XX XX XX XX
Interest expense XX XX XX XX XX
Total payment (b) XX XX XX XX XX
Net Cash Flow for the XX XX XX XX XX
Period (a-b)
Add: Cash balance, XX XX XX XX XX
Beginning
=Cash balance , Ending XX XX XX XX XX
Target cash Balance XX XX XX XX XX
Cumulative Excess (Fund XX XX XX XX XX
Requirement)

Steps in formulating a cash budget:

A. Form the sales forecast, identify how much would be collected in the
cash budget period.

Sales may be made in cash or for credit. Cash sales are translated to cash at
the point of sale while credit sales are collected depending on the credit
period. Credit periods may range from 10 days to more than a month
depending on the strategy of the company. Assume selling price is
PHP100/unit. Sales for each month are expected to be collected as follows:
a. Month of sales : 20%
b. A month after sales: 50%
c. 2 months after sales: 30%

How much is total receipts from sales?

JAN. FEB. MAR. APR. MAY TOTAL

Units 2,000 2,200 2,500 2,800 3,000 12,500
Sales in 200,00 220,000 250,000 280,000 300,000 1,250,00
Pesos 0 0
Collection 40,000 44,000 50,000 56,000 60,000 250,000
from
current
months
sales
Collection 100,000 110,000 125,000 140,000 150,000
from
previous
months
sales
Collection 60,000 66,000 75,000 84,000
from two
months
prior sales
Total 40,000 144,00 220,00 247,00 275,00 926,000
Collectio 0 0 0 0
n from
Sales

B. Identify other receipts.

These are other income that is collected currently. It will be added to
the collection to get the total receipts.

Examples:
‣ interest received
‣ return on principal investments
‣ proceeds from sale of non-operating assets
‣ issuance of capital stock
‣ proceeds from borrowings

C. Payments for Purchases

Determine how much of the purchases made will be paid by the company on
the cash budget period. Like sales, purchases may be made in cash or on
credit depending on the supplier’s credit terms. Assume that cost per unit is
PHP50. All purchases this month are paid the following month. How much
is total cash disbursements for purchases?

JAN. FEB. MAR. APR. MAY TOTAL

Required 2,050 2,200 2,500 2,800 3,000 12,550
production
Cost in Peso 102,500 110,000 125,000 140,00 150,000 627,500
0
Payment from 102,500 110,000 125,00 140,000 150,000
current 0
months sales
Payment from
previous
months sales
Payment from
two months
prior sales
Total Payment 0 102,500 110,000 125,00 140,000 150,000
for Purchases 0

D. Identify which expenses will be paid in cash during the cash budget
period.

The following expense items will be paid based on the following periods:
a. Rent payments: Rent of PHP5,000 will be paid each month.
b. Wages and salaries: Fixed salaries for the year are PHP96,000, or
PHP8,000 per month. Wages are estimated as 10% of monthly sales.
c. Tax payments: Taxes of PHP25,000 must be paid in April.

E. Identify all other cash payments to be made.

Examples:
1. Fixed-asset purchases in cash
2. Cash dividend payments
3. Principal Payments
4. Repurchase of common stock
5. Purchase of stock/bond investments
It is important to recognize that depreciation and other noncash charges are
NOT included in the cash budget.

The following items will be paid based on the following periods:

a. Fixed-asset outlays: New machinery costing PHP130,000 will be
purchased and paid for in April.
b. Interest payments: An interest payment of PHP10,000 is due in May.
c. Cash dividend payments: Cash dividends of PHP20,000 will be paid in
January.
d. Principal payments (loans): A PHP20,000 principal payment is due in
February.

JAN FEB MAR APR MAY TOTAL

Total payment 102,000 110,000 125,00 140,000 477,500
for Purchases 0
Rent Payment 5,000 5,000 5,000 5,000 5,000 25,000
Wages 20,000 22,000 25,000 28,000 30,000 125,000
Salaries 8,000 8,000 8,000 8,000 8,000 40,000
Tax Payment 25,000 25,000
Fixed Assets 130,00 130,000
outlay 0
Interest 10,000 10,000
Payment
Cash dividend 20,000 20,000
Principal 20,000 20,000
Payment

F. Match the receipts and disbursements on the periods they become

collectible and payable, respectively.

G. Set a minimum required cash balance. This balance is maintained in

case contingencies arise. Recall from the steps in planning that we should
also plan for contingencies.

H. If the net cash flow is above the minimum cash balance, the company is
in excess cash and may consider putting it in short term investments. If it is
below, the company should make a short term borrowing during that period.

Moreover, A Company has a beginning cash balance of PHP80,000 and

would like to maintain an ending cash balance of PHP100,000 per month.
Prepare A Company’s Cash Budget for January to May. Prepare a cash
budget.

JAN FEB MAR APR MAY TOTAL

Cash receipts 40,000 144,000 220,000 247,000 275,000 926,000
Less: 53,000 157,500 148,000 321,000 193,000 872,500
Cash
Disbursement
Net Cash Flow (13,000) (13,500) 72,000 (74,000) 82,000 53,500
Add: 80,000 67,000 53,500 125,500 51,500 80,000
Beginning Cash
balance
Ending Cash 67,000 53,500 125,000 51,500 133,500 133,500
Balance
Less: 100,000 100,000 100,000 100,000 100,000 100,000
Minimum Cash
Balance
Cumulative (33,000) (46,500) 25,500 48,500 33,500 33,500
excess cash
balance
(cumulative
required
funding)

Projected Financial Statements

Projected financial statements are tools of the company to set an overall goal
of what the company’s performance and position will be for and as of the
end of the year. It sets targets to control and monitor the activities of the
company. The following reports may be forecasted:
‣ Projected Income Statement
‣ Projected Statement of Financial Position
‣ Projected Statement of Cash Flows

A company
Projected Income Statements
For the years ended December 31.

2014 2013 2012 2011 2010

Net sales 5,250,000 4,770,000 4,310,000 3,910,000 3,547,000
Cost of 4,305,000 3,959,100 3,663,500 3,128,000 2,979,480
Sales
Gross 945,000 810,900 646,500 782,000 567,520
Profit
Operating 314,750 297,890 246,231 221,500 217,538
Expenses
Operating 630,250 513,010 400,259 560,500 349,982
Income
Interest 250,000 250,000 250,000 450,000 300,000
Expense
Income 380,250 263,310 150,259 110,500 49,982
before
Taxes
Taxes 114,075 78,903 45,078 33,150 14,995
Net 266,175 184,107 105,181 77,350 34,987
Income

A Company
Statement of Financial Position
 As of December, 31
2014 2013 2012 2011 2010
ASSETS
Current
Assets
Cash 1,060,000 990,000 770,000 760,000 880,000
Accounts 2,300,500 1,921,000 1,722,000 1,454,000 1,396,000
Receivable
Inventories 4,850,000 4,500,000 3,797,000 3,290,000 3,350,000
Other current 1,050,000 980,000 984,000 735,000 998,000
Assets
Total 9,260,500 8,391,000 7,273,00 6,239,00 6,624,00
Current 0 0 0
Assets
NON-
CURRENT
ASSETS
Property, 2,440,000 2,260,000 1,810,000 1,870,000 1,900,000
plant, and
Equipment
Other 835,698 925,681 896,842 876,235 827,490
Noncurrent
Assets
Total non- 3,275,689 3,185,681 2,706,84 2,746,23 2,727,49
current 2 5 0
assets
TOTAL 266,175 184,107 105,181 77,350 34,987
ASSETS
LIABILITY
and EQUITY
Current
Liability
Noted Payable
(External
Fund Needed)
Trade Payable 5,050,000 4,756,000 4,130,000 3,300,000 2,870,000
Income Taxes 28,520 19,725 11,270 8,290 3,750
Payable
Current 2,250,000 2,500,000 1,000,000 2,000,000 2,000,00
Portion of
Long-term
debt
Other current 85,600 28,700 40,990 30,688 37,890
liability
Total 7,414,120 7,304,425 5,182,26 5,338,97 4,911,64
Current 0 8 0
Liability
Non-Current
Liability
Long-term 2,000,000 1,250,000 1,000,000 3,000,000
debt, net of
current
TOTAL 9,414,120 8,554,425 5,182,26 6,338,97 7,911,64
LIABILITIES 0 8 0
Stockholder’s
Equity
Capital Stock 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Retained 2,122,069 2,022,256 3,797,582 1,646,259 439,850
earnings
Total 3,122,069 3,022,256 4,797,58 2,646,25 1,439,85
stockholders 2 7 0
’ equity
Total 12,536,18 11,575,68 9,979,84 8,985,23 9,351,49
Liability and 9 1 2 5 0
Stockholders
’ Equity

Working Capital Management

Working capital is the company’s investment in current assets such as cash,

accounts receivable, and inventories. Net working capital is the difference
between current assets and current liabilities.

The Operating Cycle

The operating cycle is the sum of days of inventory and days of receivables.

Account
CASH
Receivable

Inventory

Figure 1 Operating Cycle

Days of Inventory and Days of Receivables

Days of Inventory or inventory conversion period or average age of

inventories is the average number of days to sell its inventory.

Days of Inventory = 365 or 360 Days/ Inventory Turnover

*Inventory Turnover = Cost of Goods Sold/

Beginning Inventory + Ending Inventory/2

Days of Sales Outstanding (DSO)

It is the average time for the company to collect its receivables. The formula
is:
Days of Inventory = 365 or 360 days / Receivable Turn Over

*Receivable Turnover = Net Credit Sales / Average Receivable

Note: Average Account Receivable is Beginning + Ending Divided by 2. We

use the Average Receivables for the year in our calculation. For revenue we
generally use the credit sales so we may have to exclude cash sales from the
total sales figure.

Cash Conversion Cycle (CCC).

Cash Conversion Cycle, also called the net operating cycle, is computed as
the operating cycle less days of payable.

Formula form:
Cash Conversion Cycle = Operating Cycle - Days of Payables

Cash Conversion Cycle = (Days of Inventory + Days of Receivables) - Days of

Payables

The Cash Conversion Cycle is the length of time it takes for the initial cash
outflows for goods and services purchased (materials, labor, etc.) to be
realized as cash inflows from sales (cash sales and in the collection of
receivables).
Days of Payables Outstanding (DPO)

It is the average number of days for the company to pay its creditors. A DPO
of 30 days means that the company waits for 30 days before paying its
creditors.
The formula for DPO is:
Days of Inventory = 365(or 360)/ Payable Turnover

*Payables Turnover = Net Credit Purchases/ Average Accounts Payable

Note: Average Accounts payable is beginning accounts payable plus

accounts payable ending divided by two. Purchases are taken from the
Statement of Comprehensive Income and Accounts Payables are taken from
the Statement of Financial Position. Since the Statement of Financial
Position tells the financial condition of a company at the end of the period,
we take average payables for the year in our calculation.

Working Capital

Working Capital Management is the administration and control of the

company’s working capital. The primary objective is to achieve a balance
between profitability and risk. Basically, there are three types of working
capital financing policies the management can choose from:
- Maturity-matching working capital financing policy
- Aggressive working capital financing policy
- Conservative working capital financing policy

Managing working capital is important because failure to do so may result

in the closure of business. It must be noted that working capital
requirements increase as the size or volume of the business increases.

Permanent and Temporary Working Capital

It is the minimum level of current assets required by a firm to carry-on its

business operations given its production capacity or relevant sales range.
Temporary working capital is the excess of working capital over the
permanent working capital given its production capacity or relevant sales
range.

The networking capital needed to support an operation during the slack

season represents the permanent working capital requirements while the
additional net working capital needed during the peak season represents the
temporary working capital requirements.

Maturity-matching

All permanent working capital must be financed by long-term sources while

temporary working capital requirements should be financed by short-term
sources.

https://tinyurl.com/y3he6clv

Aggressive Working Capital Financing Policy

Under the aggressive working capital financing policy, some of the

permanent working capital requirements are financed by short-term sources
of financing.

• Why do managers of some companies adopt this policy? It is because long-

term sources of funds have higher cost as compared to short-term sources
of financing. By financing some of the permanent working capital
requirements with short-term sources of financing, financing cost is
minimized which in turn, improves net income.

• But what is the trade-off? Since it is short-term, the debt has to be paid
soon and the company may not yet have enough cash by the time the debt
matures. This refers to liquidity risk and this risk increases with the
aggressive working capital financing policy.
https://tinyurl.com/y49llktw

Conservative Working Capital Financing Policy

Based on the conservative working capital financing policy, even some of the
temporary working capital requirements are financed by long-term sources
of financing. This policy minimizes liquidity risk, but it also reduces the
company’s profitability because long-term sources of financing entail higher
interest.

https://tinyurl.com/y6bjkwqm
Strategies for managing the cash conversion cycle

The central issue in managing the working capital is the ability to reduce
operating cycle days. This is to ensure that such operating cycle days will be
shorter than the payable days. The quickness of completing the operating
cycle is measured by the operating cycle days.

The following are some of the strategies in efficiently managing the cash
conversion cycle:
1. Turn over inventory as quickly as possible without stockouts that result
in lost sales.
2. Efficiently manage the accounts receivable consistent with the company’s
credit policies. You need to also consider accelerating the collection of
receivables through:
a. Shorter credit terms.
b. Offering special discounts to customers who pay their accounts within a
specified period.
c. Speeding up the mailing time of payments from customers to the firm.
d. Minimizing the float or reducing the time during which payments received
by the firm remain uncollected funds.

Cash Management

Being the most liquid asset, cash is an important account in the balance
sheet that will affect the liquidity and solvency of a company. It is also the
most vulnerable when it comes to theft. A good internal control must be
properly implemented to safeguard this asset:

A basic internal control system entails the assignment of custodial function

and recording function to separate individuals unless you are the owner.
Why is this so? Imagine a cashier of a company who is also the chief
accountant. If tempted, this person can steal cash from the company and
can manipulate the records so that nobody can discover that he is stealing.

A good internal control over cash is by depositing all collections intact. The
daily collection reports are now compared with the deposit slips to find out if
all collections are indeed deposited. If all collections need to be deposited,
then payments must be made through a check voucher system. There must
also be two signatories in the check to provide a check and balance. If the
business is small then the entrepreneur’s signature may suffice.
For small payments like the fare given to a messenger, a petty cash fund is
used. A petty cash fund which should be minimal in amount, will be issued
to a petty cash fund custodian, say the office administrator. The petty cash
fund may be PHP10,000 or PHP20,000. Disbursements from this petty cash
funds must be supported by a petty cash voucher signed by the recipient of
the petty cash. When the petty cash fund is almost depleted, the petty cash
fund custodian will get reimbursements. This reimbursement will go
through the check voucher system where the custodian gets a check with
the petty cash vouchers as supporting documents.

The check must also be cross-checked by drawing two lines on the payee
section of the check. This cross-checking requires depositing of a check. It
cannot be encashed. This makes it more difficult for somebody to steal a
check to get the money.

Motives for Holding Cash

The following are the reasons for holding cash:

Primary Reasons

a. Transactional. This is the cash used for paying expenses such as salaries,
utilities, rent and taxes, among others.
b. Compensating balance. This is the cash held to meet bank requirements
such as the minimum cash balance you maintain for checking accounts and
if you have existing loans, banks may also require a minimum amount of
deposit with them.

Secondary Reasons

a. Precautionary

This is the cash maintained for emergencies such as the additional cash you
keep during political and economic uncertainties. For example, if your
business requires a substantial amount of importation, a relatively higher
amount of cash must be maintained when the exchange rate becomes highly
volatile due to political instability.

b. Speculative.

This refers to the cash held by the company to take advantage of

opportunities; the motive is to take advantage from fluctuations in the
market. (e.g., buying stocks at the height of the global financial crisis where
stock valuations went down by as much as 80% for some companies).

Accounts Receivable

Accounts receivables spring out of the need to sell merchandise. An

excellent business proposition is to generate sales without offering a credit
facility to customers. However, this concept is theoretically sound, but not
sustainable. Consider a real estate company which sells condominium
units at PHP5 million per unit. How many units can the property developer
sell if he sells the units only on cash basis? Do you think he can sell a lot?
Probably not as many as compared to providing installment payments.
Credit management strategically defines the quality of account receivables
collection.

The collectability of accounts receivables depends largely on the quality of

customers. The quality of customers depends on the standards or credit
policies set up and used by an organization. Credit policies are an integral
part of the credit evaluation and there are 5C’s used in credit evaluation.
These are:

Character –the willingness of the borrower to repay the loan

Capacity – a customer’s ability to generate cash flows
Collateral – security pledged for payment of the loan
Capital – a customer’s financial resources
Condition – current economic or business conditions

Proper management of accounts receivable entails having a good billing and

collection system. A good system should lead to the sending of statements of
account to customers on time. Follow-ups through phone calls or any form
of gentle reminders should be made if customers fail to pay on time. These
follow-ups can also serve as the management’s way of validating if the
contact details given by customers are still valid and if the customers still
occupy the same office.

Aging of Receivables

Aging of receivables is also a control measure to determine the amount of

receivables that are still outstanding and past due. An excellent business
proposition is to generate sales without offering a credit facility to
customers. Example of aging of receivable is shown below.
Age of Account Receivable Amount
Current P 60 million
1 - 30 day past due 20 million
31 - 60 day past due 10 million
61 - 90 day past due 3 million
Over 90 days past due 7 million
Total Php 100 million

Inventory Management

Inventory management involves the formulation and administration of plans

and policies to efficiently and satisfactorily meet production and
merchandising requirements and to minimize costs relative to inventories.
Effective inventory management becomes critical when the nature of the
products is either perishable (e.g., fruits, vegetables), fragile (e.g., glasses),
or toxic (e.g., bleaching agent).

Proper inventory management involves the determination of reasonable

levels of inventories considering the size and nature of business.
Maintaining too many inventories has costs such as carrying or holding
costs, possible obsolescence, or spoilage. On the other hand, too low
inventory can result to stockout, and eventually lost sales.

Inventory in a Manufacturing Company

In a manufacturing company, there are three types of inventory:

Raw materials – these are purchased materials not yet put into production.
Work in process – these are goods and labor put into production but not yet
finished.
Finished goods – these are goods put into production and finished. These
are ready to be sold.

The ABC Analysis

One way to control inventory is to classify inventory into a classification

system called ABC Analysis. Inventories classified as “A” are high valued
items which should be safeguarded the most. B items, on the other hand,
are average-cost items that should be safeguarded more than C items but
not as much as the A items. Last, C items have low cost and is the least
safeguarded.
.
Time to check your understanding. Ready?

What’s More

Activity 3
Read the problem carefully and do as required. Write your test notebook.

Gerry Jacobs, a financial analyst for Best Valu Supermarkets, has prepared
the following sales and cash disbursement estimates for the period of
August through December of the current year.

Month Sale Cash Disbursement

Aug. 400 300
Sept. 500 500
Oct. 500 700
Nov. 600 400
Dec. 700 500

About 90% of sales are for cash, the remaining 10% are collected one month
later. All disbursements are on a cash basis. The firm wishes to maintain a
minimum cash balance of 50. The beginning cash balance in September is
25.

Prepare a cash budget for the months of October, November, and December,
noting any needed financing or excess cash available.
 Activity 3
Answer the following question briefly. Do this in your test notebook.

The principal purpose of the cash budget is to see how much cash the
company will have in the bank at the end of the year. Do you agree? Why?

Excellent Very Satisfactory Satisfactory Needs Points

(4 pts.) (3 pts.) (2 pts.) Improvement
(1 pt.)
Earned
1.Understan Demonstrates Demonstrates Demonstrates Demonstrates
ding thorough considerable some limited
Information understanding of understanding of understanding of understanding of
and Ideas topic or theme. topic or theme. topic or theme. topic or theme.
2. Clarity Communicates Communicates Communicates ideas Communicates
ideas with a high ideas with with some clarity. ideas with
degree of clarity. considerable limited clarity.
clarity.
 What I Have Learned

Activity 4
Read the problem carefully and prepare the budget. Do this in your test
notebook.

Diogenes Dy, the General manager of DG Stores, wants to find out if their
company has enough cash to pay for a 6 million piece of property which may
be the site of another branch. This is expected to be paid in the third
quarter of 2016 should the company decide to buy it. He asked his chief
accountant to prepare a cash budget.

The following assumptions are used in the preparation of the cash budget.
a. Projected quarterly sales are as follows:
First quarter 12 million
Second quarter 15 million
Third quarter 15 million
Fourth quarter 18 million

b. Seventy percent of the sales are collected in the quarter. The remaining
30% is paid in the following quarter.

c. cost of sales is 75% of sales. Inventories are purchased in the same

quarter sales were generated. Ninety percent of the purchases is paid within
the quarter these purchases are made and the remaining 10% is paid the
following quarter.

d. Included in fixed operating expenses are salaries, rent, security which

amounted P1,000,000 for the first two quarters. The amount is expected to
increase to 1.25 million starting third quarter. Variable operating expenses
are 5% of sales.

e. Interest payments amounts to 200,000 per quarter.

f. The company is subject to 30% tax rate. Below is the estimated income tax
payment per quarter:
first quarter 500,000
second quarter 360,000
third quarter 540,000
fourth quarter 465,000

g. Cash at the beginning of 2015 is750,000. The company plans to increase

the target cash balance to 1 million in 2016.

h. Sale for the fourth quarter of 2015 was 15 million.

Required: Prepare a budgeted Balance sheet and Income statement.

 What I Can Do

Activity 5
Write a three-paragraph report/essay about this topic
“The benefits of utilizing the planning tool: Budgeting”
Do this in your test notebook.

Excellent Very Satisfactory Satisfactory Needs Points

(4 pts.) (3 pts.) (2 pts.) Improvement
(1 pt.)
Earned
1.Understan Demonstrates Demonstrates Demonstrates Demonstrates
ding thorough considerable some limited
Information understanding of understanding of understanding of understanding of
and Ideas topic or theme. topic or theme. topic or theme. topic or theme.
2. Clarity Communicates Communicates Communicates Communicates
ideas with a high ideas with ideas with some ideas with
degree of clarity. considerable clarity. limited clarity.
clarity.
3. Essay is logically Essay somewhat Central point and Ideas were
Organization organized and digresses from the flow of essay is unorganized and
well-structured central idea; ideas lost; lacks vague; no
displaying a do not logically organization and particular flow
beginning, a follow each other. continuity. was followed.
body, and a
conclusion.
Critical thinking
skills are evident.
 Assessment

Read the following questions carefully and choose the letter of the correct
answer. Write your answer in your test notebook.

1. Which type of inventory consists of all items currently in the production

process?
a. raw materials
b. work-in-process
c. finished goods
d. Capital goods

2. Which type of inventory consists of items that have been produced but
not yet sold?
a. raw materials
b. work-in-process
c. finished goods
d. capital goods

3. Which is not a basic type of inventory?

a. raw materials
b. work-in-process
c. finished goods
d. capital goods

4. Which inventory contains the basic components of the production

process?
a. raw materials
b. work-in-process
c. finished goods
d. capital goods

5. Which is the amount of assets that an applicant has available for use in
securing the credit?
a. character
b. capacity
c. capital
d. collateral

6. Which statement contains the company planned inflows and outflow of

cash?
a. Cash budget
b. Cash flow
c. Profit and Loss
d. cash distribution plan

7. What is the sum of number of days of inventory and the number of days
of account receivable?
a. accounting cycle
b. operating cycle
c. accounting period
d. inventory turnover

8. Which is not a working capital financing policy?

a. aggressive working capital policy
b. maturity-matching working capital policy
c. conservative working capital policy
d. Permanent working capital policy

9. Which is not a primary and secondary reason for holding cash?

a. transactional
b. compensation
c. precautionary
d. speculative

10. Which is not a five C’s of credit?

a. Character
b. Capacity
c. Collateral
d. Capital
e. Customer
 Additional Activities

Activity
Read the problem carefully and perform as required. Do this in your test
notebook.

Philips Company is anxious about managing cash well. On the average,

inventories have an age of 90 days and accounts receivable are collected in
60 days. Accounts payable are paid roughly 30 days after they happen. The
firm has annual sales of Php30 million. Assume there is no discrepancy in
the investment per peso of sales in inventory, receivables, and payables and
that there is a 360-day year.

1. Calculate the firm’s operating cycle.

2. Calculate the firm’s cash conversion cycle.
3. Discuss how management might be able to reduce the cash conversion
cycle.

Excellent Very Satisfactory Satisfactory Needs Points

(4 pts.) (3 pts.) (2 pts.) Improvement
(1 pt.)
Earned
1.Understan Demonstrates Demonstrates Demonstrates Demonstrates
ding thorough considerable some limited
Information understanding of understanding of understanding of understanding of
and Ideas topic or theme. topic or theme. topic or theme. topic or theme.
2. Clarity Communicates Communicates Communicates ideas Communicates
ideas with a high ideas with with some clarity. ideas with
degree of clarity. considerable limited clarity.
clarity.

Congratulations you have successfully learned the basic of planning and

working capital management!
You can now move on to the next module on sources and uses of short-term
and long-term fund.

References

Brown, F. & Reilly, K. Analysis of Investment and Management of Portfolios

10th ed.

Cabrera, M & Cabrera, G. Business Finance, Principles and Application, 2017

Cayanan, A & Borja, D. Business Finance, 2017

CHED, Teaching Guide in Business Finance, 2017

Deped, Curriculum Guide in Curriculum Guide

Keown, A. Personal Finance: Turning Money into Wealth 5th Edition

Laman, R & Laman, V. Introduction to Business Finance, 2017

https://www.investopedia.com/terms/g/gdp.asp
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