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:
  1. 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);
  2. Cash should be sufficient to meet maturing debts and operational expenses (Kaur, 2012);
  3. Holding cash has four rationale: transaction motive, precautionary motive, speculative motive, and compensating motive (Brealey, Myers & Marcus, 2011);
  4. 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);
  5. 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);
  6. 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);
  7. 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);
  8. 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:
  1. Tapping the sources of credit information about the credit applicant;
  2. Establishing credit and collection policies;
  3. Assigning duties and responsibilities, establishing procedures and controls, and providing periodic progress reports and evaluations;
  4. Regular meeting of board of directors and management to plan for monitoring schemes and strategies, review policies and ensure its implementation;
  5. 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;
  6. 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;
  7. 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);
  8. Continuous review of credit collection policies and strategies to avoid inadequate implementation that leads to high delinquency, poor collection and poor financial ratios;
  9. Monitoring and matching the overall contribution of receivables to the profitability of the firm; and
  10. 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:
  1. Determining the inventory quality, quantity, timing and location in order to meet future business requirements;
  2. Entails knowledge of the ordering, receiving, storage, picking, production and shipping processes (Bragg, 2012);
  3. Improving internal inventory-related systems, planning and projection of inventory purchases and issuances;
  4. 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);
  5. Implementation of inventory tracking systems like inventory requirements planning, just-in-time systems, two-bin systems and others;
  6. Training, educating and orienting employees on how to implement inventory policies and procedures (Garrison, Noreen & Brewer, 2012); and
  7. 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:
  1. Planning and monitoring payables that arises from purchase of goods, incurrence of expense and borrowing from banks or financial institutions;
  2. 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);
  3. Setting policies, procedures and practices with respect to payables;
  4. Proper investigation on the well-being of the firm in terms of its credit standing;
  5. Matching of current assets with payables such as determining the availability of cash and scheduling of payments (Brealey, Myers & Marcus, 2011);
  6. Communicating with suppliers and creditors in terms of credit lines (Mayer, Nolan & Wolfe, 2012);
  7. 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
  8. 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:
  1. Having a written formal investment policy for the firm that was developed by the board of directors with the assistance of the management;
  2. 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);
  3. Setting policies in WCM involving employees, management, board of directors and officers;
  4. Making investment policies that would target optimal levels of each category of current assets and liabilities;
  5. 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