Department of Education

Bureau of Learning Delivery Teaching

and Learning Division

BUSINESS FINANCE
TOOLS IN MANAGING CASH,
RECEIVABLES AND INVENTORY

Quarter 1 Week 4 Module 4

Learning Competency:
The learners shall be able to explain the tools in managing cash,
receivables and inventory.
ABM_BF12-IIIc-d-12 Week 4
 HOW TO USE THIS MODULE?

nt you to set aside other task/s that may disturb you while enjoying the lessons. Read the simple instructions below to successfully enjoy th

and instructions indicated in every page of this module.

cepts about the lessons. Writing enhances learning, that is important to develop and keep in mind. Perform all the provided activities in th
ss your answers using the answer key card.
t and apply what you have learned. Enjoy studying!

PARTS OF THE MODULE

Expectations - These are what you will be able to know after completing the lessons in the module.
Pre-test - This will measure your prior knowledge and the concepts to be mastered throughout the lesson.
Looking Back to your Lesson - This section will measure what learnings and skills did you understand from the previous lesson.
Brief Introduction- This section will give you an overview of the lesson.
Activities - This is a set of activities you will perform with a partner.
Remember - This section summarizes the concepts and applications of the lessons.
Check your Understanding - It will verify how you learned from the lesson.
Post-test - This will measure how much you have learned from the entire module

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 LESSON Tools in Managing Cash, Receivables and
1 Inventory
EXPECTATIONS

At the end of the module, you will be able to explain the tools in
managing cash, receivables, and inventory.

Specifically, this module will help you describe the concepts and tools in
working capital management.
Let us start your journey in
learning more on the Tools in
PRETEST Managing Cash, Receivables, and
Inventory. I am sure you are ready
and excited to answer the Pretest.
Smile and Enjoy!
I. MULTIPLE CHOICE

Directions: Choose the letter corresponding to the correct answer for each
of the questions provided below.
1. Which of the following is true about cash management?
a. A cost of holding cash is the liquidity it gives the firm.
b. A cost of holding cash is the interest income earned on the outstanding
cash balance.
c. Effective cash management results in minimization of the total interest
earnings involved with holding cash.
d. The primary objective in cash management is to keep the investment in
cash as low as possible while still operating efficiently and effectively.
2. The speculative motive of holding cash refers to:
a. Utilize cash in internal projects
b. Use for any future loss the company is expecting
c. Avail of any future investment opportunity
d. Utilize cash for international project
3. It is called liquid assets which include cash and savings that can be
converted to cash quickly and easily.
a. Fixed Assets c. Current Assets
b. Liability d. Equity
4. Net Working Capital is defined as:
a. Total assets minus liabilities
b. Total assets minus equity
c. Current assets minus long-term liabilities
d. Current assets minus current liabilities

5. Inventory management refers to:

a. management and control of inventory
b. management and control of services, inventory, and equipment
c. control of supplies coming into the organization and supplies used
d. control of materials purchased.
Great, you have finished
answering the questions. You
may request your facilitator to
LOOKING BACK TO YOUR LESSON check your work.
Congratulations and keep on
learning!

Last time, you have learned about the tools in planning, forecasting, and
budgeting. Try to answer the following questions to help you remember the
previous lessons.

I. MULTIPLE CHOICE
Directions: Choose the letter corresponding to the correct answer for each of
the questions provided below.
1. What is budgeting?
a. Having enough money to buy something.
b. Having money left over at the end of the month.
c. Having ability to pay bills on time.
d. A plan made in advance regarding the expenditure of money based on
available income.

2. Financial planning is a process to ensure that .

a. the cash flow of the company is positive.
b. the company is solvent.
c. the resources are unlimited.
d. the company is liquid and has paid all its investors’ dividends.

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3. What is the formula for computing production budget?
a. Expected Sales in Units + Planned Ending Inventory Units – Beginning
Inventory in Units
b. Expected Sales in Units + Beginning Inventory in Units + Planned
Ending Inventory Units
c. Planned Ending Inventory Units + Beginning Inventory in Units –
Expected Sales in Units
d. None of the above

4. It is an integral part of the planning process that makes future predictions

regarding sales trends.
a. Forecasting c. Production Budgeting
b. Budgeting d. Sales Budgeting

5. It is a detailed schedule showing the expected sales for the budget period.
a. Cash Budget c. Production Budget b. Inventory
Budget d. Sales Budget

BRIEF INTRODUCTION

This is an example of a local Philippine company and its working capital

practices.

Jollibee Foods Corporation

Statements of Financial Position as of December 31, 2019
(In Millions of PHP) Current assets

Cash and Cash Equivalents 7,618

Accounts Receivable 7,621
Inventories 5,972
Other Current Assets 2,810
Total Current Assets 24,021
Non-Current Assets 30,097
Total Assets 54,119
 Current Liabilities
Trade Payables 6,576
Other Current Liabilities 12,515
Total Current Liabilities 19,091
Non-Current Liabilities 6,950
Total Liabilities 26,041
Total Equity 28,078
Total Liabilities and Equity 54,119

What are the assets needed by Jollibee for its daily operations? Refer
your answers to the Statement of Financial Position of Jollibee shown above.

FINANCIAL PLANNING TOOLS AND CONCEPTS

The different Working Capital Assets and their importance in the

operations of the company will be discussed in this module. Working capital is
the company’s investment in current assets such as cash, accounts receivable,
and inventories while Net Working capital is the difference between current
assets and current liabilities.
This is the flow of the operating cycle of the business.

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 The operating cycle is the sum of days of inventory and days of
receivables. This is how to compute the Days of Inventory and Days of
Receivables. Days of Inventory or inventory conversion period or average age
of inventories is the average number of days to sell its inventory. A DSI of 20
days means that on the average it takes 20 days to sell its inventory. Since the
Statement of Financial Position tells the financial condition of a company at the
end of the period; we take Average Inventory for the year in our calculation. The
formula is:

Or, this formula can be used without computing for inventory turnover:

Days of Sales Outstanding (DSO) is the average time for the company to
collect its receivables. For example, a DSO of 40 days means that a customer
who purchased on the company on account will pay his/her balance in 40
days. The formula is:

Revenue is from the Statement of Comprehensive Income while Accounts

Receivables is from the Statement of Financial Position. We use the Average
Receivables for the year in our calculation. For revenue, we generally use the credit
sales so that we may have to exclude cash sales from the total sales figure.
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 To compute Cash Conversion Cycle (CCC), also called the net
operating cycle, is computed as the operating cycle less days of payable. In
formula form:

The Cash Conversion Cycle is the length of time it takes for the initial
cash outflows for goods and services purchased (materials, labor, etc.) to be
realized as cash inflows from sales (cash sales and in the collection of
receivables). Days of Payables Outstanding (DPO) is the average number of
days for the company to pay its creditors. A DPO of 30 days means that the
company waits for 30 days before paying its creditors. The formula for DPO is:

Purchases are taken from the Statement of Comprehensive Income while

Accounts Payables are taken from the Statement of Financial Position. Since
the Statement of Financial Position tells the financial condition of a company at
the end of the period, we take Average payables for the year in our calculation.

For purchases, we are generally concerned about the credit purchases so

that you may have to exclude cash purchases from the total sales figure.
Working Capital Management is the administration and control of the
company’s working capital. The primary objective is to achieve a balance
between profitability and risk. Basically, there are three types of working
capital financing policies the management can choose from:
1. Maturity-matching working capital financing policy
2. Aggressive working capital financing policy. It should be noted that
as the operating cycle and cash conversion cycle increase, more funds
are tied up in the working capital accounts.
3. Conservative working capital financing policy
Permanent and Temporary Working Capital
Permanent Working Capital is the minimum level of current assets
required by a firm to carry-on its business operations given its production
capacity or relevant sales range.
Temporary working capital is the excess of working capital over the
permanent working capital given its production capacity or relevant sales
range.

The Working Capital Financing Policies

Financing policies can either be aggressive, conservative or maturity-
matching:

Maturity-matching working capital financing policy

Based on the maturity-matching working capital financing policy,
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. Long-term sources of financing include long-
term debt and equity such as common stock and preferred stock. Short-term
sources include short-term loans from a bank. These short-term loans from
banks are called working capital loans which perfectly describe the reasons why
these loans are incurred. In maturity-matching, all permanent working capital
must be financed by long-term sources while temporary working capital
requirements should be financed by short-term sources.

Aggressive Working Capital Financing Policy

Under the aggressive working capital financing policy, some of the permanent
working capital requirements are financed by short-term sources of financing.

Why do managers of some companies adopt this policy? It is because long-term

sources of funds have higher cost as compared to short- term sources of
financing. By financing some of the permanent working capital requirements
with short-term sources of financing, financing cost is minimized which in turn,
improves net income. But what is the trade-off? Since it is short-term, the debt
has to be paid soon and the company may not yet have enough cash
by the time the debt matures. This refers to liquidity risk and this risk
increases with the aggressive working capital financing policy.

Conservative Working Capital Financing Policy

Based on the conservative working capital financing policy, some of the
temporary working capital requirements are financed by long-term sources of
financing. This policy minimizes liquidity risk and reduces the company’s
profitability because long-term sources of financing entail higher cost.
Cash
Being the most liquid asset, cash is an important account in the balance
sheet that will affect the liquidity, and solvency of a company. A good internal
control must be properly implemented to safeguard this asset.

A basic internal control system entails the assignment of custodial

function and recording function to separate individuals unless you are the
owner. Why is this so? Imagine a cashier of a company who is also the chief
accountant. If tempted, this person can steal cash from the company and can
manipulate the records so that nobody can discover that he is stealing.

Cash collections should be supported by official receipts which are

summarized in a daily collection report. The daily collection report is going to useful
for the next control measure for cash – depositing collections.

If all collections need to be deposited, then payments must be made

through a check voucher system. There must also be two signatories in the
check to provide a check and balance.

For small payments like the fare given to a messenger, a petty cash fund
is used. A petty cash fund which should be minimal in amount, will be issued to
a petty cash fund custodian, say the office administrator. The petty cash fund
may be PHP10,000 or PHP20,000. Disbursements from this petty cash funds
must be supported by a petty cash voucher signed by the recipient of the petty
cash. When the petty cash fund is almost depleted, the petty cash fund
custodian will get reimbursements. This reimbursement will go through the
check voucher system where the custodian gets a check with the petty cash
vouchers as supporting documents.

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 The check must also be cross-checked by drawing two lines on the payee
section of the check. This cross-checking requires depositing of a check. It
cannot be en-cashed. This makes it more difficult for somebody who stole a
check to get the money.

Motives For Holding Cash

These are the following reasons for holding cash:

Primary Reasons

a. Transactional. This is the cash used for paying expenses such as salaries,
utilities, rent and taxes, among others.

b. Compensating balance. This is the cash held to meet bank requirements such
as the minimum cash balance you maintain for checking accounts and if you
have existing loans, banks may also require a minimum amount of deposit with
them.

Secondary Reasons
a. Precautionary. This is the cash maintained for emergencies such as the
additional cash you keep during political and economic uncertainties. For
example, if your business requires a substantial amount of importation, a
relatively higher amount of cash must be maintained when the exchange rate
becomes highly volatile due to political instability such as what happened
during EDSA II.

b. Speculative. This refers to the cash held by the company to take advantage
of opportunities (e.g. buying stocks during major corrections such as what
happened at the height of the global financial crisis in 2008 and 2009 where
stock valuations went down by as much as 80% for some companies).

Budgeting Cash

Cash Budget provides information regarding the company’s expected cash

receipts and disbursements over a given period. It is useful for identifying future
funding requirements or excess cash within a given period. This allows
managers to find possible sources of financing if the cash budget shows cash
shortage or identify appropriate tenors for money market placements for excess
cash. Normally, a cash budget is prepared for a one year period broken down
into smaller intervals like months. This allows managers to see the seasonality
of the business which affects the cash flows.

Basically, cash budget has the following parts:

Cash Receipts include all a firm’s inflows of cash in each financial period. The
most common components of cash receipts are cash sales, collections of
accounts receivable, and other cash receipts.

Cash Disbursements include all outlays of cash by the firm during a given
financial period. The most common cash disbursements are:
1. Cash purchases
2. Purchasing fixed assets
3. Payments of accounts payable
4. Interest payments
5. Rent (and lease) payments
6. Cash dividend payments
7. Wages and salaries
8. Principal payments (loans)
9. Tax
It is important to recognize that depreciation and other noncash charges
are not included in the cash budget, because they merely represent a
scheduled write-off of an earlier cash outflow.

Net Cash Flow, Ending Cash, Financing, and Excess Cash

The firm’s net cash flow is found by subtracting the cash disbursements
from cash receipts in each period. Then we add beginning cash to the net cash
flow to determine the ending cash for each period. Finally, we subtract the
desired minimum cash balance from ending cash to find the required total
financing or the excess cash balance. If the computed amount is negative, the
company needs financing. Otherwise, the company has excess cash.
 The cash budget is part of planning. It helps managers anticipate future funding
requirements in order to obtain proper financing even before the need arises. This
will help them avoid usurious rates. On the other hand, if the company has excess
cash, managers are able identify the investment instruments that will maximize the
returns on the excess cash.

ACCOUNTS RECEIVABLE
Accounts receivables spring out of the need to sell merchandise. An
excellent business proposition is to generate sales without offering a credit
facility to customers. However, this concept is theoretically sound, but not
sustainable. Consider a real estate company which sells condominium units at
PHP5 million per unit. How many units can the property developer sell if he
sells the units only on cash basis? Do you think he can sell a lot? Probably not
as many as compared to providing instalment payments. Credit management
strategically defines the quality of account receivables collection.

The collectability of accounts receivables depends largely on the quality

of customers. The quality of customers depends on the standards or credit
policies set up and used by an organization. Credit policies are an integral part
of the credit evaluation and there are 5C’s used in credit evaluation. These are:
 Character –the willingness of the borrower to repay the loan
 Capacity – a customer’s ability to generate cash flows
 Collateral – security pledged for payment of the loan
 Capital – a customer’s financial resources
 Condition – current economic or business conditions

Proper management of accounts receivable entails having a good billing

and collection system. A good system should lead to the sending of statements
of account to customers on time.
Aging of receivables is also a control measure to determine the amount of
receivables that are still outstanding and past due. Accounts which have been
past due for more than 90 days have higher probability to default. The aging of
receivables is useful in determining the allowance for doubtful accounts.
INVENTORY MANAGEMENT

Inventory management involves the formulation and administration of

plans and policies to efficiently and satisfactorily meet production and
merchandising requirements and minimize costs relative to inventories.
Effective inventory management becomes critical when the nature of the
products are either perishable (e.g. fruits, vegetables), fragile (e.g. glasses), or
toxic (e.g. bleaching agent).

Proper inventory management involves the determination of reasonable

levels of inventories considering the size and nature of business. Maintaining
too much inventories has costs such as carrying or holding costs, possible
obsolescence or spoilage. On the other hand, too low inventory can result to
stock out, and eventually lost sales.

Inventory in A Manufacturing Company

In a manufacturing company, there are three types of inventory: Raw
materials – these are purchased materials not yet put into production; Work in
process – these are goods and labor put into production but not yet finished;
and Finished goods – these are goods put into production and finished. These
are ready to be sold.

Take the Challenge

Activity No.1

Directions: Choose the letter corresponding to the correct answer

for each of the questions provided below.

1. What is a Working capital management?

a. It is the placement of the firm’s debt and equity issues.
b. It is the financing and management of the firm’s current assets.
c. It is also known as inventory management.
d. It is the management of the firm’s capital assets.
2. What is the transactional motive of holding cash?
a. To keep a cash reserve for purchasing goods and services to balance out
the cash inflows and outflows.
b. To keep the cash for all the transactions made during a periodic term.
c. To keep the cash for transactions mandatory for day to day activities.
d. To keep the transactions for foreign trading.
3. Below are all components of working capital except:

a. Cash c. Marketable Securities b. Inventories d. Notes

Payable
4. In what order will a company’s current assets appear on a classified balance
sheet?
a. Alphabetical order c. From largest to smallest amount
b. Company’s choice d. Order of Liquidity
5. Which of the following would not be important in examining the firm's build-
up of accounts receivable, cash, and current assets:
a. A brief cash budget
b. Cash receipts and cash payments schedules
c. Income Statement
d. Sales forecast

Activity No 2

Directions: Write TRUE if the statement is CORRECT; Write FALSE if the

statement is INCORRECT.
1. Working capital is the same as net working capital.
2. The amounts needed to compute a company’s working capital
come from Income Statement.
3. The operating cycle for most companies will be longer than one
year.
4. Accounts Receivable affects the working capital of a company.
5.Time as consideration is unimportant in inventory
management.
6. Current assets should always be financed by current liabilities.
7. Account receivable is also known as notes receivable.
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 Learning Module for Business
Finance

8. The financial manager of a firm is mostly interested in the

company’s available balance, not its book balance of cash.
9. In accounts receivable management, credit analysis is the
process of determining the probability that customers will not pay.
10. Current asset is the asset that can be converted into cash
within one year.

REMEMBER

Working capital is the company’s investment in current assets such as

cash, accounts receivable, and inventories while Net Working capital is the
difference between current assets and current liabilities.

Working Capital Management is the administration and control of the

company’s working capital whose objective is to achieve a balance between
profitability and risk.

There are three types of working capital financing policies: (1) Maturity-
matching working capital financing policy; (2) Aggressive working capital
financing policy; and (3) Conservative working capital financing policy.

Cash, being the most liquid asset, is an important account in the balance
sheet that will affect the liquidity, and solvency of a company. It is also the
most vulnerable when it comes to theft. A good internal control must be
properly implemented to safeguard this asset.

Accounts receivables spring out of the need to sell merchandise. An

excellent business proposition is to generate sales without offering a credit
facility to customers. However, this concept is theoretically sound, but not
sustainable. Proper management of accounts receivable entails having a good
billing and collection system.

Page 16 of 21
 CHECK YOUR UNDERSTANDING

I. Multiple Choice
Directions: Choose the letter corresponding to the correct answer for each of
the questions provided below.
1. What is the advantage of using short-term funds?
a. There is no advantage
b. Easily obtained
c. Interest rates are normally lower
d. None of the above
2. Which of the following would not be financed from working capital?
a. A new personal computer unit for the office
b. Accounts receivable
c. Cash float
d. Credit sales
3. Which of the following statements is not true as regards to matching
strategy?
a. All assets should be financed with permanent long-term capital.
b. Temporary current assets should be financed with temporary working
capital.
c. Permanent current assets should be financed with permanent working
capital.
d. Long-term assets should be financed from long-term capital.
4. Which of the following working capital strategies is the most aggressive?
a. greater use of short-term finance and maximizing net short term asset.
b. greater use of long-term finance and minimizing net short-term asset.
c. greater use of short-term finance and minimizing net short-term asset.
d. greater use of long-term finance and maximizing net short-term asset.
5. Inventories can be classified into:
a. Product, material, item
b. Raw material, work-in progress, and finished goods
c. All of the above
d. None of the above

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 POSTTEST

Solving Problems
Directions: Solve the following problems and present your solutions below:

1. If a company has current assets of Php 530,000 and current liabilities of Php
300,000 the amount of its working capital is .

2. Ninety percent (90%) of Dove Bird Seed’s total sales of Php 600,000 is on
credit. If its year-end receivables turnover is 5, the average collection period
(based on a 365-day year) is .

3. Using the data provided on No. 2, its year-end receivable is

.

4. Paula owns and operates an apparel store. Examine her current assets and
liabilities below and compute her net working capital.
Cash Php 10,000 Accounts Payable Php 7,500
Accounts Receivable 5,000 Accrued Expense 2,500
Inventory 15,000 Other Trade Debt 5,000

5. The days’ sales in inventory is 73. The cost of goods sold is 720,000. The net
sales are Php 1,020,000, The beginning inventory was 82,000. What is the
ending inventory?
 REFLECTIVE LEARNING SHEET

Piolo Pascual: The frugal, private person behind the

bankable movie star.

Everybody knows Piolo Pascual. In a nutshell, the story tells the

bittersweet tale of a 19-year old overseas Filipino who had to work
double shifts and 16-hour duties as a hospital worker by day and a
security guard at night just to make ends meet.
At present, he is the endorser of BDO Remit. In one of its
webinars, Piolo talks about the importance of saving and how a movie
star like him has been managing his finances during the quarantine
period.
“Saving has been an important practice in our family. When I was
in school and began working, it was the practical thing to do. You save
up for things you want to buy. If you have money saved, you will have
something to bank on when unexpected situations happen, such as this
pandemic. I knew I had to set aside something for a rainy day and save
money that I can use when I do not have anything else. So, ever since I
started working, puro savings na talaga ako, I made sure I was not sure
spending beyond what I could afford. I never changed my lifestyle. I have
always lived a simple life,” Piolo said.
“I invested in farming because it is a nice feeling to grow your own
crops or eat your own produce. Nag-invest ako sa mga bagay na pwede
mong paikutin. I now have 18 chickens na galling sa farm ko para yun
na lang ang kakainin naming. Mas nakakatipid ka pa. We were going
to sell them during the lockdown dahil ang dami na ngang manok. So,
they were not just for us. We also share them with friends,” Piolo added.

Questions to ponder: Analyze Piolo’s testimony on his saving and

spending experience? How it has influenced your view on managing
finances? Use another sheet of paper for your answer.
 E-SITES

To further explore the concept learned today and if it possible to connect the internet, you may
visit the following links:

https://www.slideshare.net/ipermeeta/working-capital-management-4632140
https://www.slideshare.net/neerajchitkara/cash-management-13919917

REFERENCES

Asilo, R. (2020). Piolo Pascual: the frugal, private person behind the bankable
movie star. Philippine Daily Inquirer, Entertainment Section, July 8,
2020 issue.
Cayanan, A. & Borja (forthcoming). Business Finance. Quezon City. Rex Bookstore.
Civil Service India. (2020). Management of cash, receivables, inventory,
and current liabilities. Retrieved on July 11, 20202 from
https://www.civilserviceindia.com/subject/Management/notes/mana
gement-of- cash.html#:~:text=Management%20of%20Cash%2C
%20Receivables% 2C%20Inventory,good%20balance%20of%20these
%20factors.
Gitman, L. J. & Zutter C. J. (2012), Principles of Managerial Finance (13th Ed), USA: Prentice-
Hall
Teaching Guide for Senior High School, Business Finance, Published by the Commission on
Higher Education, 2016

Acknowledgement
Prepared by: Letessie A. Diano
ABM TEACHER
MANDAUE CITY COMPREHENSIVE NHS
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