1.1 Literature Review
Literature widely documents that WCM is relevant to financial decisions
among firms. Similar to cooperatives, WCM serves as their life blood and
they could not operate successfully as a business without adequate
amount of working capital (Dayanandan, 2010). WCM are policies on
short-term assets and short-term liabilities. The goal is to ensure that
the firm is able to continue its operations and that it has sufficient
ability to satisfy both maturing short-term liabilities and upcoming
operational expenses. It involves management of cash, receivables,
inventories, payables and short-term loans. The success of the firm is
in its ability to continuously support its operation.
Working Capital Management. Working capital management (WCM) is a
process of managing the firms’ liquidity (Şamiloğlu & Akgün, 2016). In
this case, managers focus their activities on ensuring that their
current assets can be converted into cash on a timely manner so that
they can repay their short-term debts when due. Bragg (2012) further
explained that WCM involves the management of gross working capital and
net working capital. Gross working capital refers to the firm’s
investment in current assets. Current assets are those assets used by
firm in their day-to-day operation and that can be converted into cash
within an accounting year or within an operating cycle. Examples are
cash, accounts receivable and inventories. Net working on the other hand
refers to the difference between current assets and current liabilities.
Current liabilities are those claims of external creditors which are
expected to mature for payment within an accounting year. Examples are
accounts payable, accrued expenses, and short-term loans payable.
The implementation of WCM requires broad managing and coordinating tasks
within the firm. This involves implementation of cash management,
receivables management, inventory management, payables management and
net working capital management. Effective implementation entails
adequate internal control and maintaining certain levels in order to
optimize risks in each category of current assets and liabilities.
Ideally, the current assets should be sufficient and liquid to cover
current liabilities and to maintain a reasonable margin of safety.
Hence, this study aims to evaluate these WCM areas.
Cash Management. Cash is an important resource of a cooperative
because they use this to support their operation as well as in providing
support and assistance to their members. The common benefit of
cooperatives is the creation of an avenue for the members to borrow
money or goods at a minimal interest (Kassali, Adjobi & Okparaocha,
2013). This is in fact one of the cooperatives’ way of improving the
life of its members and a way of contributing to the society. Moreover,
cash is important in generating profit whereas Brigham (2012) was
adamant that cash is the oil that lubricates the wheels of business.
This means that without cash, business could not operate and they cannot
meet their goals and objectives. There are several approaches to cash
management as follows:
- Cash must be deposited daily and the movements of cash balance should
be carefully observed. Cash held by the firm should be minimize
without adversely affecting business activities (Brigham, 2012);
- Cash should be sufficient to meet maturing debts and operational
expenses (Kaur, 2012);
- Holding cash has four rationale: transaction motive, precautionary
motive, speculative motive, and compensating motive (Brealey, Myers &
Marcus, 2011);
- Cash management involves budgeting to monitor cash inflows and
outflows that involves: cash planning, managing cash flows,
maintaining optimum level of cash, and investing surplus cash
(Garrison, Noreen & Brewer, 2012);
- Cash management includes avoiding to have negative balances because
the cost of gathering daily funds by issuing debt or by borrowing is
costly (Smart & Megginson, 2012);
- Cash management is storing excess cash in a financial asset that earns
a return like marketable securities and selling them when needed
(Hawawini & Viallet, 2011);
- Cash management involves maintaining optimum cash conversion cycle
where inventories are processed and sold faster, receivables are
collected in short period, and payment of payables are prolonged if
possible (Besley & Brighan, 2013). The cash conversion cycle
increases with days of inventory and accounts receivable while it
decreases with accounts payable (Gao & Wang, 2017);
- Cash management requires internal controls such as segregation of
custodial duties for handling and recording cash transactions, using
imprest system and voucher system, maintaining cash vaults, internal
audits, and periodic reconciliation of bank and cash balance to
prevent theft, loss or inadvertent errors in cash;
Receivables Management. Receivable management is an important
aspect of WCM. A firm granting credit has an important task and
responsibility not only for business reasons but to the socio-economic
aspect of the society as well. Especially in a cooperative, they help
their members to have a start-up fund for their undertakings yet they
also have an important role in instilling discipline to their members so
that they would be conscious about their obligations. An aggressive
lending policy can bring-in high risk potential and inability to recover
the amount lent can lead to the firm’s financial distress (Cabo &
Rebelo, 2012). For this reason, receivables management compels the
conduct of thorough analysis and evaluation of credit risks of credit
applicants. Managers would need to ensure the continuity of the firm’s
operation while investing on credit or receivables (Besley & Brigham,
2013). Receivables management include activities such as:
- Tapping the sources of credit information about the credit applicant;
- Establishing credit and collection policies;
- Assigning duties and responsibilities, establishing procedures and
controls, and providing periodic progress reports and evaluations;
- Regular meeting of board of directors and management to plan for
monitoring schemes and strategies, review policies and ensure its
implementation;
- In making credit decision, policies during the initiation process such
as screening, selection, level of credit to be granted, and approval
should be in place;
- After granting credit, a systematic means of collection procedure must
be followed such as sending a statement of account, reminder letter
and stronger demand letter;
- Risk monitoring such as determining the paying habits of customers,
evaluating the credit portfolio, determining the average collection
period, and estimating doubtful accounts expense (Besley & Brigham);
- Continuous review of credit collection policies and strategies to
avoid inadequate implementation that leads to high delinquency, poor
collection and poor financial ratios;
- Monitoring and matching the overall contribution of receivables to the
profitability of the firm; and
- Establishing adequate internal control and audit for receivables.
Inventory Management. Inventory is one of the largest investments
of firms in their current asset. Having greater inventory allows the
cooperative members to have more products to purchase but it may affect
the overall liquidity of the firm (Li, Jacobs & Artz, 2015).
Inventories include raw materials, work-in-process to finish goods. In
reality, inventory management is challenging to most managers because
they have to implement strategies that would optimize investments in
inventories. Managers face trade-offs in inventory management because
excessive stocks are costly and insufficient stocks can result to lost
sales, delays and dissatisfaction for customers and so forth. Inventory
management involves processes such as:
- Determining the inventory quality, quantity, timing and location in
order to meet future business requirements;
- Entails knowledge of the ordering, receiving, storage, picking,
production and shipping processes (Bragg, 2012);
- Improving internal inventory-related systems, planning and projection
of inventory purchases and issuances;
- Monitoring the inventory turnover such as identifying how many times
an inventory would revolve for a period. Higher inventory turnover
could reduce the cash invested in inventory and increases the firm’s
liquidity (Gao & Wang, 2017);
- Implementation of inventory tracking systems like inventory
requirements planning, just-in-time systems, two-bin systems and
others;
- Training, educating and orienting employees on how to implement
inventory policies and procedures (Garrison, Noreen & Brewer, 2012);
and
- Keeping inventory records and verification of inventory listed in the
firm’s record with the inventory actually stored.
Payables Management . Due to the expanding business operations and
the need for investing in receivables that defers the receipt of cash,
firms would incur debts to support their operation. Payables are those
current liabilities such as accounts payable, accrued expenses and
short-term loans. Proper management of these current liabilities could
make firms successful since it could help them expand operations and
increase their earnings. Current liabilities or payables management
would include processes such as:
- Planning and monitoring payables that arises from purchase of goods,
incurrence of expense and borrowing from banks or financial
institutions;
- Timing of payments to creditors. When firms delay payment to
suppliers, they can improve their cash position however it may also
harm the relationship with the creditors (Gao &Wang, 2017);
- Setting policies, procedures and practices with respect to payables;
- Proper investigation on the well-being of the firm in terms of its
credit standing;
- Matching of current assets with payables such as determining the
availability of cash and scheduling of payments (Brealey, Myers &
Marcus, 2011);
- Communicating with suppliers and creditors in terms of credit lines
(Mayer, Nolan & Wolfe, 2012);
- Using financial ratios such as payables turnover, payable days, net
working capital, current and quick ratio, and cash conversion cycle.
These financial ratios are relevant to the performance of firms
(Mazreku, Morina & Zeqaj, 2020); and
- Planning and budgeting for payables (Garrison, Noreen & Brewer,
2012).
Net Working Capital management. Another aspect of WCM is
determining the new working capital. It is determined by deducting
current liabilities from current assets. It measures the ability of the
cooperative to pay its current debts using only their existing assets
(Dayanandan, 2010). The paramount goal is to make sure that current
assets are sufficient enough to meet obligations and to achieve a
desirable net working capital balance (Kroflin & Kratz, 2015). Net
working capital management involves:
- Having a written formal investment policy for the firm that was
developed by the board of directors with the assistance of the
management;
- The written policy must be reviewed and revised as needed however, the
policy should be flexible to an extent so that managers may react
quickly to any unforeseen events (Biety, 2003);
- Setting policies in WCM involving employees, management, board of
directors and officers;
- Making investment policies that would target optimal levels of each
category of current assets and liabilities;
- Ensuring liquidity in which current assets can be readily transformed
into cash while putting excess liquidity to its most productive use
(Besley & Brigham, 2013).
Area under studyThe municipality of La Trinidad is the capital of the province of
Benguet, Philippines with a population of 129,133 based on the census
of the Philippine Statistics Authority as the year 2015. The
municipality has a land area of 70.04 square kilometers (27.04 square
miles). It politically subdivided into 16 Barangays wherein 11 were
classified as urban and 5 as rural. The municipality is known to be
the “Strawberry Fields of the Philippines”.
The municipality strongly support the promotion and development of
cooperatives. It is the only municipality in the province who
appointed a Cooperative Development Specialist who was also designated
as the Municipal Coop Development Officer. It also created a
Cooperative Development Council who would ensure that cooperatives are
included in the local development plan and to promote a strong
cooperative movement in the municipality. Currently, the municipality
has the highest in terms of registration of cooperatives, membership,
assets and net surplus in the region.
Methodology
The study used primary data through as survey questionnaire which was
personally administered to officers and managers of 66 cooperatives. The
study targeted the total population of cooperatives in the municipality
of La Trinidad, Benguet, Philippines however there were on 66
cooperatives who responded out of 78 registered cooperatives at the
Cooperative Development Authority (CDA). These registered cooperatives
have 35,473 active members and with 720 total number of employees as of
the year 2017 when this study was conducted. Table 1 provides the
profile of the respondent cooperatives.
Table 1. Profile of the Cooperatives