Student Name: Grade / Section:

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Teacher: Date Submitted:
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BUSINESS FINANCE, WEEK 5

I - Introductory Concept:

Woring Capital Management is the proper administration of current assets and

liabilities. Goor working capital management enables the firm to pay its financial obligation,
establish good relationships wih syppliers and creditors, and improve the earnings of the
company.
A working capital management is important because it can improve the business
profit. It allows the company topay its financial obligations and leads to the growth and
survival.
Current assets like cash, accounts receivables and inventories and prepaid
expenses used in the operations of the business are called working capital. It means that
they can be converted to cash, sold or exchanged. The amount of resources used in the
operations of the business can be affected by current liabilities like trade accounts payable.
Net Working capital is the difference between the currect assets and current
liabilities.

Net Working capital = Currents Assest - Current Liabilities

Operationg Cycle = Days of Inventory +Days of receivable
Days of Inventory (Inventory Conversion Period) is the average number of days to
sell its inventory.

Inventory Turnover Ratio 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Days of Inventory 365 𝑑𝑎𝑦𝑠
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜

Days of Receivable (Receivable Conversion Period) is the time it takes to collect

cash from sales of inventory.

Receivable Turnover Ratio 𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
Days of Receivable 365 𝑑𝑎𝑦𝑠
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜

Cash Conversion Cycle (CCC) is a metric that expresses the time (measured in
days) it takes for a company to convert its investments in inventory and other resources into
cash flows from sales. (Investopedia.com)
Cash Conversion Cycle = Operatig Cycle – Days of Payable
365 𝑑𝑎𝑦𝑠
Days of Inventory = 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
 𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
Payables Turnover ratio = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒

The Operating Cycle is the days to recover the inventory. Ashorer cycle is preferred
because it means business is more efficient and has enough cash to meet financial
obligaions. The company must find ways to decrease its operating cycle.

Working Capital Financial Policies

1. Maturity-matching working capital financing policy
2. Aggressive working capital financing policy
3. Conservative working capital financing policy

Permanent or fixed working capital refes to the minimum level of current assets
required by a firm to continue the operations of the business and to cover up all current
liabilities.
Temporary working capital is the difference between net working capital and
permanent working capital. It can help the business survive during the slack season.

Cash Management
Cash management invilves the maintenance of a cash and marketable securities
investment level which enables the company to meet its cash requirements and at the same
time, optimize the income of idle funds (Cabrera, 2015).
The objectives of cash management are to meet the financial obligations of the firm
and to avoid losses in the normal operation of the business.
Cash budget is used in determining the cash needs of the company. It shows the
projected cash receipts and cash disbursements for a particular periodof time.

Receivables Management
Providing credits to a customet is one way of increasing sales and gaining additional
customers. Properly managing the accounts receivable let let the company continue its
operations. To minimize loss from accounts receivable, the customer must be given credit
terms and credit evaluation must likewise be done.

Inventory Management
Inventory is the stocks of the product the business is sellingand the parts or raw
materials that made up the product.
Inventory management is very important for manufacturing and merchandising
companies especially companies with perishable products. There shouldbe a sufficient
number of inventories to secure the smooth operations of the business.
Internal controls to protect the inventories:
1. Separating the cistodial functions from recording functions
2. Aging receivables. It allows the company to decide what to do with slow moving
items.
3. ABC Analysis. This approach categorizes the inventories according to their
values.
II - Learning Competencies:

This Learning Activity Sheet is designed and written to help you understand Working
Capital Management; the dufferent financial policies, cash manageement, receivables
management, and inventory management.
After this LAS, you are expected to explain tools in managing cash, receivables and
inventory (ABM_BF12-lllc-d12) and describe concepts and tools in working capital
management.

III – Activities:

Activity 1: NET WORKING CAPITAL

Direction. Find the missing amount.
Current Assets Current Liabilities Net Working Capital
Php 648,750.00 Php 312,000.00 1. ___________
2. ___________ 1,200,000.00 840,000.00
2,850,000.00 3. ____________ 1,460,000.00
548,000.00 ¼ of the Curret assets 5. ___________
4. ______________
175% of the Net 560,000.00
Working capita
6. ____________
7. ____________

Activity 2.1. SOLVE

Given. (for Activities 2.1 and 2.2)
Accounts Beginning Ending
Inventory Php 3,500,000.00 Php 4,200,000.00
Accounts Receivable 1,800,000.00 2,400,000.00
Accounts Payable 1,300,000.00 1,450,000.00
Net Sales 7,900,000.00
Cost of Goods Sols 4,840,000.00

Direction. Solve.

Inventory Turnover Ratio 1. ___________

Days of Inventory 2. ___________
Receivable Turnover Ratio 3. __________
Days of Receivable 4. __________
Operating Cycle 5. __________
Activity 2.2. OPERATING CYCLE

Directions. Solve and Explain

Payables Turnover 1. _____________
Days of Payable 2. _____________
Cash Conversion Cycle 3. _____________
4. What do you mean by 35 days as cash Conversion Cycle?
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Activity 3. Working Capital Financing Policies

3.1. Answer the following questions.

1. Why is proper management of working capital important to a company’s
financial health?
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2. What are the three workin capital policies? Expalin in your own opinion.
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3. What are the benefita and importance of cash, accounts receivable and
inventory management?
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3.2 . Choose the correct answer. Write only the letter.
A. ABC Analysis I. Character
B. Working Capital J. Condition
C. Net working capital K. Capital
D. Maturity matching L. Days of Inventory
E. Aggressive working M. Days of receivable
F. Conservative working N. Temporary working capital
G. Collateral O. Permanent working capital
H. Capacity

1. It is the average number of days to sell its inventory.

2. It is the number of days it takes to collect cash from the sale of
inventory.
3. It is the borrower’s ability to pay the loan.
4. It is the borrower’s willingness to pay the loan.
5. It is the current economic or business environment.
6. It is the borrower’s security pledge for the loan payment.
7. It is the borrower’s financial resources.
8. It is the difference between net working capital and permanent
working capital.
9. The concept classifies the inventories into three categories according
to its importance or value.
 10. In this kind of financig policy, the permanent working capital
requirements should be financed by long-term sources while
temporary working capital requirements should be financed by short-
term sources of financing.
11. In tis kind of financing policy, some of the permanent working caiptal
requiremenst are financed by short term sources of financing.
12. In tis kind of financing policy, some of the temporary working caiptal
requiremenst are financed by long term sources of financing.

13. It is the difference between the current assets and current liabilities.
14. These are current assets used in the operations of the business.
15. It refers to the minimum level of current assetsrequired by a firm to
continue the operations of the business and to cover up all current
liabilities.

IV - Rubric for Scoring:

5 The answer is well written, organized and the idea is very relevant to the
question.
4 The answer is fairly written, and the idea is almost relevant to the question.
3 The answer is somewhat relevant to the question.
2 The answer is unclear.
1 The answer does not address the question.

V - Answer Key:

Activity 1:.

Current Assets Current Liabilities Net Working Capital

Php 648,750.00 Php 312,000.00 336,750.00
2,040,000.00 1,200,000.00 840,000.00
2,850,000.00 1,390,000.00 1,460,000.00
548,000.00 137,000.00 411,000.00
980,000.00 420,000.00 560,000.00

Activity 2.1.

Inventory Turnover Ratio 1.25

Days of Inventory 292
Receivable Turnover Ratio 1.88
Days of Receivable 194
Operating Cycle 98

Activity 2.2.
 Payables Turnover 5.74
Days of Payable 63.58
Cash Conversion Cycle 35
1. What do you mean by 35 days as cash Conversion Cycle?
It takes 35 days to get the cash from its investment in inventory and
accounts receivable.
Activity 3. 1 (1 to 3). The answer will depend on the student.
Activity 3.2.
1. M
2. L
3. H
4. I
5. J
6. G
7. K
8. N
9. A
10. F
11. E
12. D
13. C
14. B
15. O

VI. Reflection:

I learned that
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I realized that
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VI – Reference:

Business Finance Quarter 3 – Module 1.1: Introduction to Financial Management

Schools Division Office of Bataan

Teaching Guide for Senior High School, Business Finance

MARIA-JESUSA MEDROSO MERIAM CAMILA JINKY A.VILLAREAL

Writer Principal/Quality Assurer EPS II, Mathematics
Consultant