This document discusses working capital management. It defines working capital and current assets. The scope and goals of working capital management are to support a firm's operations and sales based on factors like industry, sales volume, cash flows, and operating cycle length. Working capital comprises a large portion of assets and affects liquidity, profitability, and long-term survival. The two main working capital policy decisions are determining the level of current asset investment and the manner of financing working capital, which can be aggressive, moderate, or conservative based on the risk-return tradeoff.

2. OBJECTIVES
1. State the scope, goal and
importance of working capital
management
2. Know the basic working capital
management decision and
strategies that the finance manger
should make.

3. REVIEW:
Working capital – is the firm’s total
investment in current assets.
Current Assets – are assets are likely to be
converted into cash, sold, exchanged, or
expensed in the normal course of business,
usually within one year.
Net working capital – is the difference between the
firm’s current assets and current liabilities

4. SCOPE AND GOAL OF WORKING CAPITAL
MANAGEMENT
Factors affecting a form’s working capital
position
1. The kind of firm.
- Manufacturing
- retailing
- service organization
For example, retailing firms have a high proportion of
total assets in the Current category because they earn
Their return from current assets such
As inventory.

5. 2. The volume of sales.
More current assets, such as, accounts
receivable and inventories are needed to
support higher level of sales.
3. The variability of cash flows.
The greater the fluctuations in the
firm’s cash inflows and outflows, the greater the
level of net working capital required.

6. 4. The length of the operating cycle.
The length of time cash is tied up in a firm’s
operating process.
For example, the length of operating cycle of a
manufacturing firm is the length of time required
to purchase raw materials on credit, produce and
sell a product, collect sales receipts, and repay
the credit.
shortening the operating cycle reduces the
amount of time funds are tied up in networking
capital and thus lower the level of working capital
required.

7. WHY IS WORKING CAPITAL MANAGEMENT
IMPORTANT
1. WC comprises a large portion of firm’s total
assets.
2. WCM directly affect the firm’s liquidity and
profitability.
3. WC represents those assets that are most
manageable.
4. WCM consumes the largest portion of the
financial manager’s time.
5. WCM directly affects the firm’s long – term
growth and survival.

8. WORKING CAPITAL POLICY DECISIONS
The minimum level of WC held over the cycle
is called the permanent working capital,
or permanent assets.
The minimum level of total assets held over
the cycle is called permanent assets.

9. TWO BASIC FUNCTIONS OF WCP
1. Level of investment in current assets.
2. Manner of financing working capital

10. FIRST DECISION – LEVEL OF INVESTMENT
0
20
40
60
80
100 150 200 250
CURRENT ASSETS
(P)
SALES (P)
POLICY Current assets to support sales of P150
Relaxed
Moderate
Restricted
60
46
32
Relaxed or loose
Moderate
Restricted

11. 1. RELAXED CURRENT ASSET
INVESTMENT.
- a policy under which relatively
large amounts of cash,
marketable securities, and inventories
are carried and under which sales are
stimulated by a liberal credit policy,
resulting in a high level of receivables.

12. RESTRICTED CURRENT INVESTMENT POLICY
- a policy under which
holding cash, securities,
inventories, and
receivables are
minimized

13. MODERATE CURRENT ASSET
INVESTMENT POLICY
A policy that is between
the relaxed and restricted
policies

14. SECOND WC POLICY DECISION
- Involves the manner of financing working capital
Permanent Current
Assets
Fixed assets
Time
Pesos(Php)
Long – term
financing
Short – term
financing
strategy
A M C
A – Aggressive financing strategy
M – Moderate financing strategy or maturity matching
C – Conservative financing strategy
Fluctuating
Current assets

15. AGGRESSIVE STRATEGIES
• Are high – risk, high – return approaches to
working capital management.
• A firm using this aggressive current liabilities
strategy borrows heavily on a short – term basis.
Short – term debt is use to finance all of a firm’s
fluctuating assets plus some of its permanent
current assets, and the firm increases its risk of
being unable to repay or replace the debt as it
matures.
• Risk is also increased because short – term
interest rates are more volatile than long – term
rates.
• The expected rate of return increases due to the
lower cost associated with short – term financing.

16. MODERATE STRATEGIES
• are moderate – risk, moderate – return
approaches strategies to WCM.
• Most firm follow moderate strategies in which
they use intermediate levels of both current
assets and non – current liabilities.
• The matching or hedging approach matches of
the source of funds to the length of time the
funds are needed.
• This strategy finances short – term sources and
long – term needs with long – term sources.

17. CONSERVATIVE STRATEGIES
• Are low – risk, low – return approaches to WCM.
• CS include holding liquid assets, especially cash and
marketable securities, in excess of expected needs
and minimizing the amount of short – term financing
used to finance them.
• CS substitutes long – term financing for short – term
borrowing.
• Only part of a firm’s fluctuating assets are financed
with short – term debt and the remainder with long –
term capital.
• The risk of being unable to repay or replace short –
term debt reduced because of the lower amount of
current liabilities. Profitability is also reduced
because of the higher cost of long – term financing.

18. A firm’s WC requirements rise and fall with
both business cycles and seasonal trends.
At the peak of such cycles, business carry
the maximum amounts of working capital.
However, even at the troughs of these
cycles, the working capital accounts do not
fall to zero.