Module 3 - Topic 3

PRINTABLE LEARNING MATERIAL
Module 3- Topic3: Working Capital Management
LEARNING OUTCOME:
Explain tools in managing cash, receivables, and inventory. (ABM_BF12-IIIc-d-12)
Computing Cash Management/ Cash Budget Preparation
Problem:
1. Past collections experienced by Business Avengers Company indicate 60% of
the net sales billed in a month are collected during the month of sales, and 40%
are collected in the following month. A record of monthly net sales of previous
months is as follows:
January P200,000
February P250,000
2020 March P300,000
April P350,000
May P400,000
Computation
January: 200,000 [200,000X60%=120,000]-January Collections
[200,000X40%=80,000]- February Collections
February: 250,000[250,000X60%=150,000]- February Collections
[250,000X40%=100,000]- March Collections
March: 300,000 [300,000X60%=180,000]- March Collections
[300,000X40%=120,000]- April Collections
April: 350,000 [350,000X60%=210,000]- April Collections
[350,000X40%=140,000]- May Collections
May: 400,000 [400,000X60%=240,000]- May Collections
Solution Guide: Schedule of Monthly Collections

Months Net Sales January February March April May
January P200,000 120,000 80,000
February P250,000 150,000 100,000
March P300,000 180,000 120,000
April P350,000 210,000 140,000
May P400,000 240,000
Total Collections 120,000 230,000 280,000 330,000 380,000
2. Purchases for the first five months of the Business Avengers Company are as
follows:
Month Purchases
January 40,000
February 80,000
March 100,000
April 120,000
May 150,000
3. Other expenses are as follows:

Expenses January February March April May
Salaries 3,000 3,000 3,000 3,000 3,000
Advertising 2,500 2,500 2,500 2,500 2,500
Supplies 1,000 1,000 1,000 1,000 1,000
Rent 2,000 2,000 2,000 2,000 2,000
4. Beginning Cash is 110,000
Business Avengers Company

Cash Budget
January-May 2020
January February March April May

Sales P200,000 P250,000 P300,000 P350,000 400,000
Cash 120,000 150,000 180,000 210,000 240,000

1 month AR 80,000 100,000 120,000 140,000
Total Cash 120,000 230,000 280,000 330,000 380,000
Collections
Schedule of
Disbursements
Purchases 40,000 80,000 100,000 120,000 150,000
Salaries 3,000 3,000 3,000 3,000 3,000
Advertising 2,500 2,500 2,500 2,500 2,500
Supplies 1,000 1,000 1,000 1,000 1,000
Rent 2,000 2,000 2,000 2,000 2,000
Total Cash
Disbursements 48,500 88,500 108,500 128,500 158,500
Net Cash
Change 71,500 141,500 171,500 201,500 221,500
Beginning
Cash Balance 110,000 181,500 323,000 494,500 696,000
Ending Cash
Balance 181,500 323,000 494,500 696,000 917,500
There can be a “MINIMUM CASH BALANCE” to be maintained.
Managing Accounts Receivables
 A company should grant its customers the proper flexibility or level of commercial
credit while making sure that the right amounts of cash flow in via operations.
 A company will determine the credit terms to offer based on the financial strength
of the customer, the industry’s policies, and the competitors’ actual policies.
 Credit terms can be ordinary, which means the customer generally is given a set
number of days to pay the invoice (generally between 30 and 90).
 The company’s policies and manager’s discretion can determine whether
different terms are necessary, such as cash before delivery, cash on delivery,
bill-to-bill, or periodic billing. (Lifted from:
https://corporatefinanceinstitute.com/resources/knowledge/finance/working-capital-management/)
Accounts Receivables Key Indicators
1. Days Sales Outstanding (DSO)
DSO is used to calculate how quickly you are able to collect the money owed to you
after the sale has been completed; the average collection period.
DSO= (Accounts receivable / total credit sales) x number of days in the period.
(Lifted from: https://www.erpvar.com/blog/bid/108970/5-accounts-receivable-management-key-performance-

indicators-kpis)
2. Aging of Accounts Receivables
An account receivable aging is also known as a schedule of accounts receivable. A

variation is that this schedule may contain a simple listing of receivables by the
customer, rather than breaking them down further by age. (Lifted from:
https://www.accountingtools.com/articles/what-is-accounts-receivable-aging.html)
(Lifted from: https://www.educba.com/accounts-receivable-aging/)

Managing Inventory
 Aims to make sure that the company keeps an adequate level of inventory to
deal with ordinary operations and fluctuations in demand without investing too
much capital in the asset.
 an excessive level of inventory means that an excessive amount of capital is tied
to it. It also increases the risk of unsold inventory and potential obsolescence
eroding the value of inventory.
 A shortage of inventory should also be avoided, as it would determine lost sales
for the company. (Lifted from:
https://corporatefinanceinstitute.com/resources/knowledge/finance/working-capital-management/)
Licensing & Attributions / References

 Benito, Patricia, Yumang, Kenneth (2016) Exploring Small Business and Personal Finance. Phoenix
Publishing House
 Santoyo, Alfredo, Lim, Edralin & Patiu, Liberty. (2018) Business Finance. MaxCor Publishing House Inc
 CFI Education, Inc. (2015-2021). Retrieved January 18, 2021, from
https://corporatefinanceinstitute.com/resources/knowledge/finance/working-capital-management/
 Lee J. (2014). Retrieved January 18, 2021, from https://www.erpvar.com/blog/bid/108970/5-accounts-
receivable-management-key-performance-indicators-kpis

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PRINTABLE LEARNING MATERIAL

Module 3- Topic3: Working Capital Management

Computing Cash Management/ Cash Budget Preparation

Solution Guide: Schedule of Monthly Collections

3. Other expenses are as follows:

4. Beginning Cash is 110,000

Business Avengers Company

January February March April May

Cash 120,000 150,000 180,000 210,000 240,000

Accounts Receivables Key Indicators

1. Days Sales Outstanding (DSO)

(Lifted from: https://www.erpvar.com/blog/bid/108970/5-accounts-receivable-management-key-performance-

2. Aging of Accounts Receivables

An account receivable aging is also known as a schedule of accounts receivable. A

(Lifted from: https://www.educba.com/accounts-receivable-aging/)

Licensing & Attributions / References

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