FACULTY OF BUSINESS

ACCOUNTING SCHOOL

ACADEMIC REPORT

COURSE:

CORPORATE FINANCE

AUTHOR:

CUPERTINO FERNANDEZ, KRIS PRINCESA

TEACHER:

MARIA DEL ROSARIO, VALVERDE

Huaraz - Peru

(2023)
Content
I. INTRODUCTION ........................................................................................................................1
II. DEVELOPMENT .........................................................................................................................2
2.1 Definitions of working capital in companies ...........................................................................2
2.2 Importance of Working Capital ...............................................................................................3
2.2.1 Impact of Working Capital on Liquidity and Solvency ..........................................................3
2.3 Components of Working Capital .............................................................................................4
2.3.1 Current Assets .....................................................................................................................4
2.3.2 Current Liabilities .................................................................................................................4
3. Inventories ................................................................................................................................5
3.1 Strategies to optimize inventories in a company: ...................................................................6
3.2 Strategies to optimize each component of working capital ....................................................6
3.3 Inventory Management Techniques: ......................................................................................6
4. How financing decisions affect capital structure: .....................................................................7
4.1 Risks Associated with Working Capital: ..................................................................................8
III. BIBLIOGRAPHICAL REFERENCES ............................................................................................9
 I. INTRODUCTION

Efficient management of working capital is a fundamental aspect for the operation

and financial health of companies. In this context, various definitions and
approaches to working capital have been proposed by researchers such as
Jȩdrzejczak -Gas (2017), Zhang et al. (2023), and Sah et al. (2022). Working
capital encompasses both current assets and liabilities, being essential to finance
the daily operations of a company and ensure its operational efficiency, according
to Sah et al. (2022).
Within the framework of working capital, the importance of net working capital is
highlighted, which, according to Sah et al. (2022), represents the difference
between current assets and liabilities, being a key indicator of the company's
liquidity. Proper management of this component allows debt obligations to be met
and guarantees greater capacity to face financial eventualities.
Furthermore, the implementation of strategies such as operational and financial
working capital, according to Hassan et al. (2023), contributes to meeting financing
needs in both the short and long term. The search for an optimal balance, known
as ideal working capital, according to Palomeque (2020), becomes a crucial
objective to operate efficiently without generating excess liquidity or facing liquidity
problems.
Furthermore, the relevance of working capital is examined in terms of its impact on
the liquidity and solvency of a company, as noted by Padrón et al. (2021). The
balance between current assets, such as cash, accounts receivable, and
inventories, and current liabilities, such as accounts payable and short-term debt,
is crucial to ensuring the company's ability to meet its short- and long-term
obligations. Author Chambers & Cifter (2022) highlights the importance of
managing accounts payable efficiently, negotiating favorable terms with suppliers
to optimize cash flow.
This document explores the importance of working capital, its components and
strategies to optimize them. Likewise, the implications of financing decisions on
the capital structure are analyzed and the risks associated with working capital are
highlighted, offering a comprehensive view of how these variables impact the
financial and operational management of companies.

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 II. DEVELOPMENT

2.1 Definitions of working capital in companies

According to (Jdrzejczak-Gas, 2017) working capital, it is the set of

financial resources that a company has to finance its daily operations. Likewise, it
is essential for a company to operate efficiently and effectively. Without sufficient
working capital, a business may struggle to pay its expenses, meet its debt
obligations, and fulfill its customer orders.
According to (Zhang etal., 2023) working capital, it can be divided into two
components: current assets and current liabilities. Current assets are assets that
are expected to be converted into cash within one year or less. Current liabilities
are debts that are due within one year or less.
The author states (Sah etal., 2022) that net working capital is the difference
between current assets and liabilities. Net working capital is a measure of a
company's liquidity. Positive net working capital indicates that the company has
more current assets than current liabilities, giving it a greater ability to meet its
debt obligations.
Operating working capital is the working capital necessary to finance the
daily operations of a company. It can also be calculated as the difference between
sales and cost of goods sold.
For the author (Hassan etal., 2023) Financial working capital is the working
capital necessary to finance a company's long-term investments. It can also be
calculated as the difference between fixed assets and long-term liabilities.
(Palomeque, 2020) Ideal working capital is the level of working capital that
allows a company to operate efficiently and effectively, without generating excess
liquidity.
An excessive level of working capital can create inefficiencies, since the
company will have more money than it needs for its daily operations.
On the other hand, an insufficient level of working capital can lead to
liquidity problems, which can affect the company's ability to meet its obligations.
Companies can actively manage their working capital to optimize their cash flow
and reduce costs.

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2.2 Importance of Working Capital

Working capital is the set of financial resources that a company has to

finance its daily operations. It is made up of current assets (cash, accounts
receivable, inventories) and current liabilities (accounts payable, short-term debt).
In accordance with (Sah etal., 2022) They highlight that there is an optimal
amount of working capital for companies that balances benefits and costs and
maximizes the value of companies, it is crucial for the survival and success of a
company. Without an adequate level of working capital, a company may have
difficulty meeting its short-term obligations, such as paying its employees,
suppliers, and creditors. This can lead to bankruptcy of the company.
2.2.1 Impact of Working Capital on Liquidity and Solvency

Liquidity is a company's ability to convert its assets into cash in the short
term. Solvency is the ability of a company to meet its long-term obligations.
The author (Padrón etal., 2021) mentioned has a significant impact on the
liquidity and solvency of a company. An adequate level of working capital helps
ensure that the company has enough cash to pay its short-term obligations. This,
in turn, helps ensure that the company is solvent in the long term.
Working capital is an important indicator of a company's financial health. An
adequate level of working capital is essential for a business to operate efficiently
and effectively. (Olmedo-Lozada & Sauza-Ávila, 2022) It allows the company to
meet its short-term obligations: Working capital provides the company with the
financial resources necessary to pay its invoices to suppliers, employees and
creditors. Without an adequate level of working capital, a company may struggle to
meet these obligations, which can lead to liquidity problems and ultimately
bankruptcy.
The author (Sawarni etal., 2023) states that Operational Efficiency and
Improvement: An adequate level of working capital allows the company to
maintain an adequate level of inventory, which reduces delivery delays and
improves customer satisfaction. Additionally, an adequate level of working capital
can help the company take advantage of growth and expansion opportunities.
Reduces financial risk: An adequate level of working capital helps reduce a
company's financial risk. This is because it provides the company with a greater
ability to absorb financial shocks, such as a drop in sales or an increase in costs.

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2.3 Components of Working Capital

Working capital is made up of two main components: current assets and

liabilities.
2.3.1 Current Assets

Current assets are assets that are expected to be converted into cash
within one year or less. The main current assets are:
Cash: Cash is cash and cash equivalents, such as cashier's checks,
demand deposits, and short-term marketable securities.
Accounts Receivable: Accounts receivable are debts that customers owe
to the company for products or services provided to them.
Inventories: Inventories are the assets that the company has available for
sale or for use in the production process.
(Hassan etal., 2023) Cash is the most liquid asset a company has. It is
important to maintain an adequate level of cash to be able to meet short-term
obligations, such as paying employees, suppliers and creditors.
Implement an efficient collections process: This can help ensure that
accounts receivable are collected in a timely manner.
Use factoring: Factoring is a process by which a company sells its accounts
receivable to a factoring company in exchange for a cash advance.
2.3.2 Current Liabilities

Current liabilities are debts that are due within one year or less. The main
current liabilities are:
Accounts payable: Accounts payable are the debts that the company
owes to its suppliers for the products or services it has purchased from them.
(Ahmad etal., 2023) Accounts payable are the debts that the company owes
to its suppliers for the products or services it has purchased from them. It is
important to pay accounts payable on time to prevent interest and late fees from
accruing.
However, it is possible to negotiate with suppliers for a longer payment
period. This can help the company free up cash for other needs.
Short-term debt: Short-term debt is debt that a company owes creditors,
such as banks, within a year or less.

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 (Chambers & Cifter, 2022) Low interest rates make short-term debt more
attractive to companies, as it allows them to finance their current assets at a
relatively low cost. Long-term debt carries less risk for the borrower, but also
poses a greater threat to the company as it may be more difficult to repay.
This financing plan requires companies to obtain all the money needed for
their current assets, and some of the money needed for their fixed assets, from
sources that have not been invested for more than a few years.
3. Inventories

Inventories are the assets that the company has available for sale or for use
in the production process. It is important to maintain an adequate level of inventory
to meet customer demand. However, carrying excess inventory can be costly, as
the company will have to pay storage costs and obsolescence costs.
Piling up inventory instead of optimizing the supply chain, optimizing
resources, or improving operational discipline can be counterproductive.
Investing in inventory without considering these factors can lead to
inefficient inventory management, which can increase costs, reduce profitability,
and harm customer satisfaction.
3.1 Strategies to optimize inventories in a company:

(Sawarni etal., 2023) An inventory management system can be used: An

inventory management system can help the company determine the appropriate
level of inventory to meet customer demand.
just - in-time approach : The just - in-time approach involves producing or
purchasing goods only when they are needed. This can help reduce inventory
costs.
3.2 Strategies to optimize each component of working capital

Strategies to optimize working capital components vary depending on the

type of business and the company's specific circumstances. However, some
general strategies that can help improve working capital management include:
(Sawarni etal., 2023) Track working capital levels: It is important to track
working capital levels on a regular basis to identify any potential issues.
Establish working capital objectives: It is important to establish working
capital objectives to guide working capital management.

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 Implement efficient processes: It is important to implement efficient
processes to manage current assets and liabilities.
3.3 Inventory Management Techniques:

Methods to optimize inventory levels:

Efficient inventory management is essential to ensure the liquidity and
profitability of a company. Various methods can be used to optimize inventory
levels, including:
According to (Padrón etal., 2021) one of the methods, it is “just in time
(JIT)”: it states that this approach involves receiving inventory just when it is
needed for production or sale, thus reducing costs associated with storage and
obsolescence.
Automatic Reordering (ROA): Using automated systems, the company can
establish reorder points, allowing for automatic replenishment of inventory when
levels reach certain minimums.
ABC Analysis: Classifying products into categories A, B and C according to
their importance and rotation helps focus attention on the management of critical
products, thus optimizing cash flow.
The role of technology in efficient inventory management:
According to (Hassan etal., 2023) technology it plays a crucial role in
efficient inventory management. Tools such as inventory management systems
(IMS) and radio frequency identification (RFID) technologies allow:
Real-Time Tracking: The ability to monitor inventory in real time reduces
the possibility of errors and optimizes decision making.
Process Automation: Automating repetitive tasks, such as inventory
tracking and reporting, increases operational efficiency.
Predictive Analytics: Using algorithms and predictive analytics, companies
can anticipate demand and adjust inventory levels proactively.
Effect of Financing Decisions on Working Capital:
Relationship between financing decisions and working capital requirements:
Financing decisions have a direct impact on working capital requirements.
Some key points include:
Sources of Financing: The choice between debt and equity affects the
financing structure, which, in turn, influences working capital requirements.

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 Cost of Capital: The cost associated with financing impacts the company's
ability to finance its daily operations and efficiently manage its working capital.
4. How financing decisions affect capital structure:

Financing decisions can significantly alter a company's capital structure. For

example:
According to (Olmedo-Lozada & Sauza-Ávila, 2022) Financial Leverage:
The use of debt can increase the return on equity, but it also introduces additional
financial risks that must be considered in working capital management.
According to (Olmedo-Lozada & Sauza-Ávila, 2022) Dividend Policy: The
distribution of profits influences liquidity and, therefore, the company's ability to
finance its daily operations.
In relation to the dividend policy, the distribution of profits has a direct
impact on the liquidity of the company and, consequently, on its ability to finance
daily operations. The decision to pay dividends or retain profits to reinvest in the
company influences the short-term financial position. A generous dividend
distribution can provide benefits to shareholders, but it can also limit the
company's ability to deal with unforeseen events and investment opportunities.
Thus, the management of the dividend policy must take into account both the
needs of shareholders and the financial requirements to maintain the operational
health of the company.
4.1 Risks Associated with Working Capital:

Identification and management of risks related to working capital:

Managing risks associated with working capital is essential to guarantee
financial stability. Some risk areas include:
The author states (Dhole etal., 2019) Credit Risk: Related to the ability of
clients to pay on time, this risk can be mitigated through effective credit policies
and analysis of the client's solvency.
The author states (Dhole etal., 2019) Inventory Risk: Obsolescence,
changes in demand and errors in inventory management can negatively affect
profitability.
In relation to inventory risk, the author warns about the possible negative
impacts on the company's profitability. Factors such as obsolescence, unforeseen
changes in demand and errors in inventory management can adversely affect

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 financial efficiency. Consequently, it highlights the importance of careful inventory
management to avoid losses and ensure long-term profitability.

III. BIBLIOGRAPHIC REFERENCES

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