THE MANAGEMENT OF

WORKING CAPITAL
By: Lilibeth E. Loria
MBA-ELD
02/02/2018
 INTRODUCTION
Working capital management is the management of the short-term investment
and financing of a company.
Goals:
- Adequate cash flow for operations
- Most productive use of resources
Internal and External Factors that Affect Working Capital Needs
Internal Factors External Factors
• Company size and growth rates • Banking services
• Organizational structure • Interest rates
• Sophistication of working capital • New technologies and new products
management • The economy
• Borrowing and investing • Competitors
positions/activities/capacities

Bottom line: There are many influences on a company’s need for working capital.
 THE DEFINITION AND INTERTERPRETATION OF
WORKING CAPITAL

Working capital is usually defined as:

Working Capital = Current Assets – Current Liabilities

Current Assets ST Operating Liabilities
Receivables – Clients Suppliers
Inventories Employees
Other ST Assets Taxes
Total: 5,000 php Total: 3,000 php
Working ___________________
Capital ST Financial Debt
1,000 php Total: 1,000 php
Fixed Assets Capital
Machinery LT Debt
Plant Bonds
Other Fixed Assets LT Bank Debt
Total: 5,000 php Equity
Total: 6,000 php
Three Meanings of Working Capital
- In financial perspective, working capital refers to the firm’s investment in
two types of assets

- Working capital means a business’ investment in short-term assets

needed to operate over a normal business cycle.

- It is the company’s overall nonfixed asset investments.

 Business Uses of
Working Capital
• Most fundamentally, working
capital investment is the
lifeblood of a company.
Without it, a firm cannot stay
in business.
• It addresses seasonal or
cyclical financing needs.
 Permanent and
Cyclical Working
Capital
• The permanent working capital
investment provides an ongoing
positive net working capital
position, that is, a level of current
assets that exceeds current
liabilities.

• Cyclical working capital is best

financed by short-term debt since
the seasonal build up of assets to
address seasonal demand will be
reduced and converted to cash to
repay borrowed funds within a
short predictable period.
 Forms of Working Capital Financing
1. Line of Credit
- it is an open-ended loan with a borrowing limit that the business can draw
against or repay at any time during the loan period.
-interest is paid only on the amount borrowed, typically on a monthly basis.
- can be secured or unsecured.

Advantages
1) It allows the company to minimize the principal borrowed and the
resulting interest payments.
2) It is simpler to establish and entails fewer transaction and legal costs,
particularly when it is unsecures
2. Accounts Receivable Financing

- The maximum loan amount is ties to a percentage of the borrower’s

accounts receivable.
- When A/R increase, the allowable loan principal also rises.

Advantages
1) Borrowing capacity grows automatically as sales grow.
2) it provides a good borrowing alternative for business without the financial
strength to obtain an unsecured line of credit.
3) It also allows small businesses with creditworthy customers to use the
stronger credit of their customers to help borrow funds.
3) Factoring

-Entails the sale of accounts receivable to another firm, called the factor,
who then collects payment from the customer.

Advantages
- It saves the cost of establishing and administering its own collection
system.
- A factor can often collect A/R at a lower cost than a small business, due to
economies scale, and transfer some of these savings to the company.
- Factoring is a form of collection insurance that provides an enterprise with
more predictable cash flow from sales.
4) Inventory Financing
- it is a secured loan with inventory as collateral.
- Inventory financing is more difficult to secure since inventory Is riskier
collateral than accounts receivable.

Two Methods
1. Warehouse storage – pledged inventory is stored in a public warehouse
and controlled by an independent party (the warehouse operator).
2. Direct assignment by serial number –a simpler method to control
inventory used for manufactured goods that are tagged with a unique serial
number.
References:

https://uk.sagepub.com/sites/default/files/upm-binaries/5005_Seidman_Chapter_5.pdf

Chapter 8 Working Capital Management – CFA Institute

THANK YOU!