MAIN COMPONENTS OF WORKING CAPITAL MANAGEMENT

When it comes to working capital management, certain balance sheet accounts take on
greater importance. Though working capital is frequently calculated by comparing all
current assets to current liabilities, there are a few accounts that must be monitored
more closely.

CASH
Working capital management is around tracking cash and cash needs. This entails controlling
the organization's cash flow by projecting demands, monitoring cash balances, and
optimizing cash inflows and outflows to ensure that the company has enough money to
satisfy its obligations.

Naa diri ang pag track sa cash balance sa isa ka business. The movement of all business’
cash in and out. To make sure that the business always have enough money on hand to
keep their business running smoothly. It's all about managing your cash flow to make
sure you're not caught short when it comes time to pay your bills.

Cash inflow may come from sales of products or services, investment returns, or financing.
Cash outflow is money moving out of the business like expense costs, debt repayment, and
operating expenses. The movement of all your cash—in and out—is recorded in detail on the
cash flow statement in your financial reporting

RECEIVABLES
This is especially essential in the short term, as they await credit sales to be completed. This
includes overseeing the company's credit policy, tracking consumer payments, and enhancing
collection procedures.

Managing receivables is important because it affects how much cash your business has
available. This involves setting clear rules about when customers need to pay, keeping
track of who has paid and who hasn't, and making sure you collect payments on time.
By staying on top of receivables, you can improve your cash flow and make sure you have
enough money to cover your own expenses and obligations.

The balance of money due to a firm for goods or services delivered or used but not yet
paid for by customers.

If you don't keep track of accounts receivable, you may forget to bill certain customers,
or you may not know if you've been paid. You could end up providing your product for
free, negatively impacting your profitability or naa na silay loss dayon. The longer you
take to send an invoice, the less likely you'll receive payment promptly.
PAYABLES
Payables are one area of working capital management that businesses may benefit from and
often have more control over. While other components of working capital management may
be outside the company's control (e.g., selling goods or collecting receivables), businesses
frequently have a role in how they pay suppliers, what credit conditions are in place, and
when cash outlays occur.

Payables are like the bills that a business owes to its suppliers for goods or services it
has received but hasn't paid for yet. Unlike some other aspects of managing money, like
getting customers to pay their bills on time, businesses have more control over payables.
This is because they can negotiate with suppliers about when and how they will pay. By
managing payables well, businesses can improve their cash flow and financial health. For
example, they might negotiate longer payment terms or take advantage of discounts for
paying early, helping them to better manage their working capital and overall finances.

An early payment discount is one form of trade finance in which a buyer pays less than
the full invoice amount due by paying the supplier earlier than the invoice maturity
date. An early payment discount is also commonly referred to as a cash discount or
prompt payment discount.

Overall, accounts payable management is an important part of running a successful

business as it helps ensure that payments are made on time, relationships with suppliers
remain strong, ensures control of expenses, and makes sure that cash flow remains
manageable.
INVENTORY
Companies prioritize inventory in working capital management because it is potentially the
most problematic part of capital management. When inventory is sold, a business must go to
market and rely on consumer preferences to convert it into cash. If this cannot be performed
in a timely manner, the business may be obliged to keep short-term resources in an illiquid
state. Alternatively, a business may be able to sell the inventory fast, but only at a significant
price discount.
Companies prioritize inventory in working capital management because it is crucial sa isa ka
business. Kay if you sell your products or gusto nimo mahalin dayon di
When a business sells its inventory, it depends on customers buying those items. Illiquid
assets are like things you own that are hard to sell quickly or at a fair price because
there aren't enough people interested in buying your product. Mao to if inana gani
hinay ang income mao to need pa sa company nga mag offer big discounts para lang
paliton and it might not make as much profit kay dako gud ug discount . So, managing
inventory carefully helps businesses balance having enough stock to sell without getting
stuck with too much of it or having to sell it at low prices.

This is different from liquid assets like money in your bank account or popular items
that are easy to sell quickly.
Rapidly changing customer demand

A company should ideally hold enough of each inventory item to meet customer demand
through regular and peak seasons, but circumstances can quickly alter customer demand. For
example, a colder-than-predicted winter may increase demand for winter gloves.

A strong understanding of customer needs and accurate demand forecasting can help
solve this issue.
TYPES OF WORKING CAPITAL
Working capital is defined simply as the difference between current assets and current
liabilities. However, there are other sorts of working capital, each with its own
importance in helping a company better understand its short-term needs.

Working capital, also known as net working capital (NWC), is the difference between a
company's current assets—such as cash, accounts receivable/customers' unpaid bills,
and inventories of raw materials and finished goods—and its current liabilities, such as
accounts payable and debts.

Permanent Working Capital: Permanent working capital refers to the amount of resources
required by a company to run its operations continuously. This is the lowest amount of
short-term resources required for operations.

Also known as fixed working capital. Naa diri ang minimum level of current assets that a
business needs to have in order to sustain its day-to-day operations. Kani sya ang silbi
foundation para maka operate ang company sa ilang day to day operations.

Examples of permanent working capital include rent, utilities and overheads, and
employee salaries, which need to be maintained at stable levels

Now, permanent working capital can be further subdivided into two categories:

Regular Working Capital:

Regular working capital is least amount of capital required businesses require to fund its day
to day operations. For example, cash needed for making payment of utilities, raw materials,
salaries comes under regular working capital.

Regular working capital is like the everyday money a company needs to handle its daily
activities. It's a part of the total money needed for long-term operations, but it's
specifically focused on covering immediate expenses like buying inventory, paying bills.
This portion of working capital is considered crucial because it's what keeps the business
running smoothly on a day-to-day basis.

Reserve Working Capital: Reserve working capital is the other part of permanent working
capital. Companies may require additional working capital to cover emergencies, seasonality,
or unanticipated events. (These are short-term financial funds that business needs.)

So ang Business mag need some amount of capital for unforeseen circumstances for
example natural calamities and emergencies like can be used to cover unexpected costs
such as equipment repairs, legal fees, or sudden increases in operating expenses.
Fluctuating Working Capital:

Variable expenses change from month to month.

So it is the capital invested for a temporary period in the business. Fluctuating capital is
about understanding these changes in money needs based on the business's assets or
size, and how it affects managing its finances. the cost of electricity is a variable cost
since electricity usage increases with the number of products that are produced or
manufactured.

It helps businesses understand how much flexibility they have with their money and how they
can manage it to meet their needs.

Gross Working Capital: Gross working capital is simply the total amount of a company's
current assets before accounting for any short-term liabilities.

This refers to the aggregate amount of funds invested in the current assets of the business. In
other words, Gross Working Capital is the total of the current assets of the business. These
include:

Cash
Accounts Receivable
Inventory
Marketable Securities and
Short-Term Investments

Net Working Capital: Net working capital is defined as the difference between current
assets and current liabilities.

The difference between a business' short-term assets and its short-term debts and liabilities. It
is ideal to have a positive net working capital, it shows that the business can meet its financial
obligations, like paying bills or salaries, and naa pa silay excess nga money to invest in other
operational requirements.

On the other hand, if a business has a negative net working capital, it means that the business
kay mas dako pa ang debts kaysa sa income nila. This can be a sign of financial strain and
may require the business to find ways to improve its cash flow or manage its debts better.
Financial distress is a condition in which a company or individual cannot generate
sufficient revenues or income, making it unable to meet or pay its financial obligations.
This is generally due to high fixed costs, a large degree of illiquid assets, or revenues
sensitive to economic downturns.
Overall, having a positive net working capital is ideal for a business as it indicates financial
stability and the ability to handle its financial responsibilities while having room for
investment and growth.

WORKING CAPITAL CYCLE

In addition to the ratios mentioned above, organizations may use the working capital
cycle to manage working capital. Working capital management contributes to the smooth
operation of the net operating cycle, also known as the cash conversion cycle (CCC)—the
shortest length of time required to convert net current assets and liabilities into cash. The
working capital cycle is a measure of how long it takes a corporation to transform its
current assets into cash, or:
Working Capital Cycle in Days = Inventory Cycle + Receivable Cycle - Payable Cycle

INVENTORY CYCLE
The inventory cycle is like a journey for a company's products from start to finish. First, the
company buys raw materials or items to sell (inventory). Then, it turns these materials into
finished products. These products are then stored until customers buy them. Throughout this
process, the company's money is tied up in these products (cash held in inventories).

At the beginning of the cycle, the company uses its cash to buy materials, but it doesn't get
the cash back until the products are sold. So, the company invests its money upfront (working
capital) with the hope that it will make a profit when it sells the products later. It's like putting
money into making something to sell, expecting to get more money back when customers
buy it.