TOPIC 3

WORKING
CAPITAL
MANAGEMENT
 CURRENT ASSET

CURRENT LIABILITIES

Working Capital
RISK

PROFITABILITY

PERMANENT FUND

SEASONAL FUND

AGGRESSIVE STRATEGY

CONSERVATIVE STRATEGY
 JAK Co mpany
CURRENT ASSETS CURRENT LIABILITIES
Co mpar ati ve State me nt o f F i nanci al Po si ti o n
As o f Y e ar Ende d
Assets 2022 2021
- represent the portion of investment that C urrent Assets
- represent the firm’s short-term financing,
Cash 363,000.00 288,000.00
circulates from one form to another in because they include all debts of the
Marketable Securities 68,000.00 51,000.00
the ordinary conduct of business. firm that come due503,000.00
(must be paid)
FCF = OCF – NFAI - NCAI in 1
Accounts Receivable 365,000.00
Inventory year or less. 289,000.00 300,000.00
Total C urrent Assets 1,223,000.00 1,004,000.00
N on-current Assets
Land and Building 2,072,000.00 1,903,000.00
Machinery and Equipment 1,866,000.00 1,693,000.00
Furniture and Fixture 358,000.00 316,000.00
Vehicle 275,000.00 314,000.00
Others 98,000.00 96,000.00
Accumulated Depreciation (2,295,000.00) (2,056,000.00)
Total N on-C urrent Assets 2,374,000.00 2,266,000.00
Total Assets 3,597,000.00 3,270,000.00
CURRENT ASSETS
Liabilities and Owner's Equity CURRENT LIABILITIES
C urrent Liabilities
Accrued Expenses 382,000.00 270,000.00
-Accounts Payable
represent 79,000.00
the portion of investment that 99,000.00 - represent the firm’s short-term financing,
Notes Payable 159,000.00 114,000.00
circulates from one form to another in because they include all debts of the
Total C urrent Liabilities 620,000.00 483,000.00
the ordinary conduct
Non-C urrent Liabilities
of business. firmFCF
that come
= OCF due–(must
NFAI be- paid)
NCAI in 1
Long-term Debt 1,023,000.00 967,000.00 year or less.
Total Non-C urrent Liabilities 1,023,000.00 967,000.00
Shareholder's Equity
Preferred Stock 200,000.00 200,000.00
Ordinary Stock - Capital 191,000.00 190,000.00
Share Premuim 428,000.00 418,000.00
Retained Earnings 1,135,000.00 1,012,000.00
Total Shareholder's equity 1,954,000.00 1,820,000.00
Total Liabilities and SHE 3,597,000.00 3,270,000.00
PROFITABILITY RISK

- is the relationship between revenues and - is the probability that a firm will be
costs generated by using the firm’s unable to pay its bills as they come due.
assets—both current and fixed—in FCF = OCF – NFAI - NCAI
productive activities.
 PROFITABILITY RISK

INCREASE
CURRENT ASSET
TOTAL ASSETS FCF = OCF – NFAI - NCAI
DECREASE

INCREASE
CURRENT LIABILITIES
TOTAL ASSETS
DECREASE
PERMANET FUNDING SEASONAL FUNDING

- A constant investment in operating - An investment in operating assets that

assets resulting from constant sales over varies over time as a result of cyclic
time. FCF
sales. = OCF – NFAI - NCAI

AGGRESSIVE STRATEGY CONSERVATIVE STRATEGY

- A funding strategy under which the firm
funds its seasonal requirements with - A funding strategy under which the firm
short-term debt and its permanent funds both its seasonal and its
requirements with long-term debt. permanent requirements with long-term
debt.
AGGRESSIVE STRATEGY CONSERVATIVE STRATEGY

SHORT
FCF - NCAI TERM
SHORT DEBT
TERM
TEMPORARY DEBT TEMPORARY
CURRENT ASSETS CURRENT ASSETS LONG
TERM
PERMANNET CURRENT ASSETS LONG PERMANNET CURRENT ASSETS
DEBT
TERM
NON-CURRENT ASSET DEBT NON-CURRENT ASSET
CASH CONVERSION CYCLE

Cash
OPERATING CYCLE

Management
AGE OF AR

AGE OF INVENTORY

PAYMENT PERIOD

COLLECTION PERIOD

365 / 360

AP AGE
OPERATING CYCLE CASH CONVERSION CYCLE

- The time from the beginning of the - The length of time required for a
production process to collection of cash company to convert cash invested in its
from the sale of the finished product. operations
FCF = to cash–received
OCF NFAI -asNCAI
a result
of its operations.

AVERAGE AGE OF INVENTORY XXX AVERAGE AGE OF INVENTORY XXX

COLLECTION PERIOD XXX COLLECTION PERIOD XXX
OPERATING CYCLE XXX PAYMENT PERIOD (XXX)
CASH CONVERSION CYCLE XXX
 In 2023, MAS MASAYA had annual
revenues of 98,786 million, cost of revenue AVERAGE AGE OF INVENTORY 17.5
of 57,057 million, and accounts payable COLLECTION PERIOD 44.8
1 of 8,054 million. MM had an average age
of inventory (AAI) of 17.5 days, an
average collection period (ACP) of 44.8
OPERATING CYCLE 62.30

days, and an average payment period AVERAGE AGE OF INVENTORY 17.5

(APP) of 51.2 days (MM’s purchases were COLLECTION PERIOD 44.8
$57,416 million). PAYMENT PERIOD (51.2)
CASH CONVERSION CYCLE 11.1
 In 2023, MAS MASAYA had annual
revenues of 98,786 million, cost of revenue AVERAGE AGE OF INVENTORY 17.5
of 57,057 million, and accounts payable COLLECTION PERIOD 44.8
1 of 8,054 million. MM had an average age
of inventory (AAI) of 17.5 days, an
average collection period (ACP) of 44.8
OPERATING CYCLE 62.30

days, and an average payment period AVERAGE AGE OF INVENTORY 17.5

(APP) of 51.2 days (MM’s purchases were COLLECTION PERIOD 44.8
$57,416 million). PAYMENT PERIOD (51.2)
CASH CONVERSION CYCLE 11.1

17.5 44.8
AVERAGE AGE OF INVENTORY COLLECTION PERIOD

PAYMENT PERIOD CASH CONVERSION CYCLE

51.2
 In 2023, MAS MASAYA had annual
revenues of 98,786 million, cost of revenue AVERAGE AGE OF INVENTORY 17.5
of 57,057 million, and accounts payable COLLECTION PERIOD 44.8
1 of 8,054 million. MM had an average age
of inventory (AAI) of 17.5 days, an
average collection period (ACP) of 44.8
OPERATING CYCLE 62.30

days, and an average payment period AVERAGE AGE OF INVENTORY 17.5

(APP) of 51.2 days (MM’s purchases were COLLECTION PERIOD 44.8
$57,416 million). PAYMENT PERIOD (51.2)
CASH CONVERSION CYCLE 11.1

INVENTORY 57,057 M X (17.5/365) 2,735,609,589

ACCOUNTS RECEIVABLE 98,786M X (44.8/365) 12,124,966,575
ACCOUNTS PAYABLE 57,416 M X (51.2/365) 8,053,970,411
RESOURCES INVESTED 6,806,605,753
 Nicholson Company holds, on average, CASH & MS 50,000
$50,000 in cash and marketable securities, ACCOUNTS RECEIVABLE 750,000
2 $1,250,000 in inventory, and $750,000 in
accounts receivable. Nicholson’s
business is very stable over time, so its
INVENTORY
ACCOUNTS PAYBABLE
1,250,000
(425,000)
PERMANENT FUNDING 1,625,000
operating assets can be viewed as
permanent. In addition, Nicholson’s
accounts payable of $425,000 are stable
over time.
 Semper Pump Company, which produces CASH & MS 25,000
bicycle pumps, has seasonal funding ACCOUNTS RECEIVABLE 60,000
3 needs. Semper has seasonal sales, with its
peak sales being driven
by the summertime purchases of bicycle
INVENTORY
ACCOUNTS PAYBABLE
100,000
(50,000)
PERMANENT FUNDING 135,000
pumps. Semper holds, at minimum,
$25,000 in cash and marketable securities,
$100,000 in inventory, and $60,000
in accounts receivable. CASH & MS 25,000
ACCOUNTS RECEIVABLE 400,000
At peak times, Semper’s inventory INVENTORY 750,000
increases to $750,000, ACCOUNTS PAYBABLE (50,000)
and its accounts receivable increase to
FUNDING NEEDED 1,125,000
$400,000. To capture production
efficiencies, Semper produces pumps at
a constant rate throughout the year. Thus
accounts payable remain at $50,000
throughout the year
 ABC SYSTEM

Inventory
TWO BIN METHOD

Management
ORDER COST

CARRYING COST

ECONOMIC ORDER QUANTITY

SAFETY STOCKS

SHORTAGE

OVERAGE
A B C SYTEM TWO-BIN METHOD

A B C 1 2
FCF = OCF – NFAI - NCAI

GR OU P
1 2
 2 X ANNUAL USAGE X
E CONOMIC ORDER COST
CARRYING COST

O RDER CARRYING COST

Q UANTITY ECONOMIC
ORDER
QUANTITY

MODEL ORDER COST

ORDER COST CARRYING COST

- Include the fixed clerical costs of placing - are the variable costs per unit of holding
and receiving orders an item of inventory for a specific period
of time.
FCF = OCF – NFAI - NCAI
▪ cost of writing a purchase order
▪ storage costs
▪ Cost of processing the resulting
▪ insurance costs
paperwork
▪ costs if deterioration and obsolescence
▪ Cost of receiving an order
▪ Cost of checking it against the invoice

TOTAL ORDER COST TOTAL CARRYING COST

= ANNUAL USAGE X ORDER = EOQ X CARRYING
EOQ COST 2 COST
4 MAX Company, a producer of dinnerware,
has an A group inventory item that is vital to
the production process. This item costs
$1,500, and MAX uses 2,000 units of the item
2 X 2,000 X 100
250
per year. MAX wants to determine its
optimal order strategy for the item. 40 units
Additional Information:

Order cost per order = $100

Carrying cost per unit per year = $250

TOTAL ORDER COST TOTAL CARRYING COST

= 2,000 X 100 = 40 X 250
40 2

5,000 5,000
 40 units
ECONOMIC ORDER QUANTITY
4 MAX Company, a producer of dinnerware,
has an A group inventory item that is vital to
the production process. This item costs 5,000
$1,500, and MAX uses 2,000 units of the item TOTAL ORDER COST
per year. MAX wants to determine its
optimal order strategy for the item.
TOTAL ORDER COST
5,000
Additional Information:

Order cost per order = $100 CARRYING COST

Carrying cost per unit per year = $250

5,000 40 units

ORDER COST

5,000
REORDER POINT SAFETY STOCK

- reflects the number of days of lead time - Extra inventory that is held to
the firm needs to place and receive an prevent stockouts of important
order and the firm’s daily usage of FCF = OCF – NFAI - NCAI
items.
inventory.
 EOQ CARRYING COST ORDERING COST

SHORTAGE INCREASE

FCF = OCF – NFAI - NCAI

DECREASE

INCREASE
OVERAGE DECREASE
5 MAX Company, a producer of dinnerware,
has an A group inventory item that is vital to
the production process. This item costs
$1,500, and MAX uses 2,000 units of the item
per year. MAX wants to determine its
optimal order strategy for the item.

Additional Information:
Lead Time: 3 days
Safety stock Requirement: 5 units

REORDER POINT REORDER POINT

= 2,000 X 3 = 2,000 X 3 + 5 UNITS
365 365

17 UNITS 22 UNITS
 MAS Company uses a small casting in one of
its finished products. The MAS Company
purchases 54,000 casting per year at a cost

6 of P8 per casting.

The casting is used evenly during the year in

the production process on a 360-day-per-
year-basis.

The Cost per order is P90 and P3 to carry one

inventory.

Delivery from the supplier generally takes 6

days, but it can take as much as 10 days.
DELIVERY PERCENTAGE OF
TIME OCCURRENCE
6 75%
7 10%
8 5%
9 5%
10 5%
 QUESTION 1 What is the EOQ? 1,800
Order Cost 90
Carrying Cost 3
Annual Usage 54,000

6 QUESTION 2 Assuming the company w ill not prov ide

any safety stock, how much w ould be the
annual inv entory cost? 5,400.00

Av erage I nv entory 900

TOTAL Order Cost 2700
TOTAL CARRYING COST 2700

QUESTION 3 Assuming the company is w illing to assume 15%

of being stock out, how much is safety stock?

Normal Lead Time 6

Extended 7
Daily Usage 150
Normal Reorder Point 900
Safety Stock 150
REORDER POI NT 1,050

QUESTION 4 Assuming the company is w illing to assume 5%

of being stock out, w hat is reorder point?

Normal Lead Time 6

Extended 9
Daily Usage 150
Normal Reorder Point 900
Safety Stock 450
REORDER POI NT 1350