SAN PEDRO COLLEGE

12 C. Guzman Street, 8000 Davao City, Philippines

Master of Arts in Hospital Administration

Third Trimester, SY 2019-2020

ACCOUNTING & FINANCIAL MANAGEMENT

LESSON 1 – WORKING CAPITAL MANAGEMENT

WORKING CAPITAL

It is the sum of a healthcare organization’s investment in current assets, or simply

defined as current assets.

Current assets may include:

1. Cash – includes money available for operations which may be cash on hand and cash
in bank. Money substitutes like money orders, bank checks, bank drafts and
treasury warrants are also included in this classification.
2. Petty cash fund – is fund set aside for small expenses to be incurred during the
current operations of the business. This is usually bills and coins.
3. Accounts receivable – are amounts collectible from patients, PHIC, and non-PHIC
(such as DSWD, PCSO, HMOs, LGUs, etc.) for services that the healthcare has
already provided.
4. Inventories – include value of drugs and supplies on hand at a given point in time.
When used, they are presented as expenses.
5. Prepayments – are expenses paid in advance (such as rent, insurance, salaries, etc.)
and to be consumed in the next accounting period.

Current assets are often measured in terms of their liquidity or their ability to be
consumed or converted to cash. Cash is considered as the most liquid current asset.

Broadly, the term working capital is synonymous with net working capital. Limitedly, net
working capital is the difference between current assets and current liabilities. It is an
important measure of an organization’s ability, or its short-term debt-paying capacity.

Importance of working capital

It is the catalyst that makes fixed or long-term assets productive.

Sources of working capital

Healthcare organizations obtain their permanent working capital form the owners to
cover start-up costs. For government organizations, this capital comes from the
government entity through taxes. For non-profit organizations, this capital may come
from the community, religious order, or philanthropy. For profit organizations, this may
be obtained from sales of shares of stocks.

Temporary working capital, which is the additional working capital needed to respond to
increases in business that are the result of seasonal fluctuations, should be financed by
equity, debt, or trade credit.

Aids in Analyzing Working Capital

Current Ratio = Current Assets/ Current Liabilities

Quick Ratio = Quick Assets*/ Current Liabilities

* cash, short-term investments, receivables

CASH MANAGEMENT

Nature and purpose

It refers to the efficient and effective utilization of cash to attain company objectives.
Cash is the most liquid of all current asset items and is used to meet financial
requirements so that its flow must be carefully planned and controlled.

Aids in Analyzing Cash

1. Number of days in cash cycle – refers to the length of time that elapses from the
point cash payment is made for purchases to the point of collection from customers/
clients to whom the goods/ services have been sold.

Number of days’ sales in inventory xx

Number of days’ sales in receivables xx
Number of days’ purchases in payables (xx)
Total number of days in cash cycle xx

2. Cash cycles in one year – is computed as:

No. of cash cycles in a year = 360 days/ no. of days in cash cycle

3. Minimum cash balance – may be set based on desired number of days’ of operations
to be covered. The latter may vary under different circumstances considering the
relative liquidity of current assets and willingness of suppliers to deliver goods and
services under extended terms of payment.

Cash balance to cover 10 days’ requirement:

Annual cash requirement x 10 days = xx

360 days

4. Cash float – refers to temporarily unclaimed funds because of time lag between
issuance and subsequent clearing of checks. Upon issuance of checks, the amount
thereof is subtracted from the Cash account balance per books of the company but it
is only upon clearance with the depository bank that the amount is deducted by the
bank form the account of the issuing company.

Mailing float xx
Processing float xx
Clearing float xx
Total cash float xx

Cash Management Strategies

1. Collect receivables as quickly as possible without resorting to high pressure collection

techniques.
2. Stretch accounts payable. Pay bills as late as possible without adversely affecting
credit rating.
3. Turn over inventory as quickly as possible (or even go to the extent of eliminating
inventories in some cases so that upon manufacture or purchase, they are
automatically sold or consumed.)
RECEIVABLE MANAGEMENT

Nature and Purpose

Account Receivables Management refers to the set of policies, procedures, and practices
employed by a company with respect to managing sales offered on credit. It
encompasses the evaluation of client credit worthiness and risk, establishing sales terms
and credit policies, and designing an appropriate receivables collection process.

Accounts receivables are found on the balance sheet of a company and are considered a
short-term asset. They are the one of the backbones of sales-generation, and thus must
be managed to ensure they are eventually translated into cash-flows.

A company that fails to efficiently convert its receivables into cash can find itself in a
poor liquidity position, crippling its working capital and facing unpleasant operational
difficulties.

Aids in Analyzing Receivables

1. Account Receivable Turnover - used to quantify a company's effectiveness in

collecting its receivables or money owed by clients.

Total credit sales

Average accounts receivable

2. Number of days in receivable – used to determine the number days to collect the
receivables.

360 days/ accounts receivable turnover

3. Ratio of receivables to net credit sales – used to determine how much of a

company’s sales are on credit.

Accounts receivable
Net credit sales

Credit and Collection Techniques

1. Direct sends
2. Concentration banking
3. Lockbox system
4. Direct payment to depository banks
5. Direct deposit to company’s bank account
INVENTORY MANAGEMENT

Nature and Purpose

Inventory management refers to the formulation and administration of plans and policies
to efficiently and effectively meet the organization’s requirements and minimize costs
relative to inventories. Its objective is to maintain inventory at a level the best
reconciles turnover and profit considerations and consequently, maximizes return on
investment.

Aids in Analyzing Inventory

1. Ratio of inventory to sales = Average inventory

Sales

2. Inventory turnover = Cost of goods sold

Average inventory

3. Number of days’ sales in inventory = Number of days in one year

Inventory turnover

Inventory Valuation

1. First-in, First-Out (FIFO) – the first item is taken out of the inventory. It produces
inventory of newer items.
2. Weighted average – the total cost of the items is averaged to identify the average
cost per unit and then multiplied to the items remaining. This is applicable for items
that are priced low.
3. Specific identification – the actual cost of each item in inventory is identified. It is
used when inventory items are easy to identify and when the cost of each inventory
item is high.
QUIZ – WORKING CAPITAL MANAGEMENT

Multiple Choice:

1. Which of the following statements is most correct?

a. The current ratio is calculated as net working capital divided by current liabilities.
b. Gross working capital represents current assets used in operations.
c. Net working capital is defined as current assets minus liabilities.
d. Statements b and c are correct.

2. Which of the following statements about current asset management is most correct?
a. A positive net float means that a company has more cash available for its use than
the amount shown in the company’s books.
b. Use of a lockbox reduces the possibility that petty cash will be lost.
c. Depreciation has an impact on the cash budget.
d. All of the statements above are correct.

3. Analyzing days sales outstanding (DSO) and the aging schedule are two common
methods for monitoring receivables. However, they can provide erroneous signals to
credit managers when:
a. Customers’ payments patterns are changing.
b. Some customers take the discount and others do not.
c. Sales are relatively constant, either seasonally or cyclically.
d. None of the statements above is correct.

4. Which of the following might be attributed to efficient inventory management?

a. High inventory turnover ratio.
b. Low incidence of production schedule disruptions.
c. High total assets turnover.
d. All of the statements above are correct.

5. Which of the following statements is incorrect about working capital policy?

a. A company may hold a relatively large amount of cash if it anticipates uncertain sales
levels in the coming year.
b. Credit policy has an impact on working capital since it has the potential to influence
sales levels and the speed with which cash is collected.
c. Holding minimal levels of inventory can reduce inventory carrying costs and cannot
lead to any adverse effects on profitability.
d. Managing working capital levels is important to the financial staff since it influences
financing decisions and overall profitability of the firm.
CASE PROBLEMS

Case 1

Sheree pays for its purchases two weeks after the date of purchase. It maintains its
inventory at a level equal to 10 days’ sales and sales are made on 30 days term.

Required: How long is the cash cycle in days?____________________

How many cash cycles must it have in one year? _____________
Case 2

The following data are given on X Corporation:

Cost of sales per annum P2,160,000
Operating expenses (including depreciation
and other non-cash charges of P78,000) 660,000
Required: How much is the corporation’s minimum cash balance if it is to be equal to
10 days’ requirement? __________________

Case 3

It takes 4 days to process vouchers and issue checks. From the date a check is issued, it
takes 2 days to have it signed by the corporate signatories, 10 days on the average before
they are claimed by suppliers, and 5 days for their deposit by suppliers and clearance in
the banking system.
Required: How long is the cash float in days?___________________

Case 4

Total sales of XYZ Corporation amount to P1,200,000 with credit sales equal to
P1,080,000. Accounts receivable averages P75,000.
Required: What is the ratio of receivables to credit sales?______________
What is the receivable turnover?_____________

Case 5

Sales on account amount to P1,980,000 and accounts receivable average P200,000.

Required: What is the average collection period (in days) at present?

Case 6

DEF Corporation provides you with the following data:

Sales P1,080,000
Cost of sales 648,000
Inventory, beginning 38,000
Inventory, ending 34,000
Required: What is the ratio of average inventory to sales?______________
What is the inventory turnover?_____________
What is the no. of days sales in inventory?_____________