A Term Paper Entitled: Maintaining Working Capital And Current Assets To The Business Profitable

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Submitted as a Partial Fulfillment Of The Requirements in English Communication II, 7:00-8:00 AM,MWF,CS105

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Submitted by; Orjas, Anizza Marie Chavez BSBA-Financial Management

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Submitted to; Mr. Rolando R. Calubayan March ,2012

TABLE OF CONTENTS

Letter of Transmittal Abstract Acknowledgement Dedication List of Invitation

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Chapter 1

Introduction Scope and Limitation Background of The Study Statement of The Problem Thesis Statement Methodology

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Chapter 2

Enhancing The Profitability of The Firms Making The Business Profitable Managing Working Capital Problems that maybe Encountered in Business Effects of Working Capital and Current Assets in Business .. .. ..

Chapter 3
Conclusion

Chapter 4

Recommendation

Appendix Index Glossary Bibliography

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LETTER OF TRANSMITTAL
Adamson University 900 San Marcelino Street, Ermita, 1000 Manila

March __, 2012

Mr. Rolando R. Calubayan Professor, Foreign Languages Department Adamson University 900 San Marcelino Street, Ermita, 1000 Manila

SIR:

The researcher wholeheartedly submits this research paper entitled, Maintaining Working Capital and Current Assets to Make The Business Profitable as a partial fulfillment of the requirements in English communication II,7-8 AM,MWF,CS105. This research paper contains useful topics for the knowledge and information for the readers, such as: 1. 2. 3. 4. 5. Enhancing The Profitability of The Firms Making The Business Profitable Managing Working Capital and Current Assets Problems that maybe Encountered in Business Effects of Working Capital and Current Assets in Business

The researcher sincerely hopes that this research study will meet your most favorable approval.

Sincerely yours,

Anizza Marie C. Orjas.

STATEMENT OF THE PROBLEM

The reasearcher attempts to answer the following questions in this research study; 1. How can working capital enhance the profitability of the firms? 2. Why a business must be profitable? 3. Why should working capital be managed? 4. What are the problems that maybe encountered in business? 5. How can working capital and current assets affect the business?

ACKNOWLEGEMENT

The researcher wishes to express her deepest gratitudes and warmest appreciations to the following people who in one way or another have contributed and inspired the researcher to the overall success of this undertaking:

y To her loving parent s, Alicia and Enrile Orjas, for being supportive and for always being there for her in all the things that she needed; y To her friends, Fatima, Trexiah and Aldwin, who lent a book to her and helped her in doing her research paper; y To her teacher in highschool, Mam. Marylyn, who also lent a book for her and who gave advice on how to do a good thesis; y To her teacher in English, Mr. Rolando Calubayan, who corrected her research study; And most of all to the Almighty God who never ceases in loving us and giving his continued guidance.

The researcher

MANAGING WORKING CAPITAL

Customers can be provided with quality products and services if the company has adequate fund to finance day-to-day operations. This funding requirement is covered by the firm s working capital. Working capital is a portion of the firm s capital continuously converted into cash fund, from its inventories, to accounts receivables to cash and it is a measure of a company s strength. It is very important to manage working capital. This is important from the point of view of both liquidity and profitability. When there is a poor management of working capital, funds may be unnecessarily tied up in idle assets. This will reduce liquidity of the company and also the company will not be in a position to invest in productive assets like plant and machinery. It will affect profitability of the company. Every organization should budget an appropriate amount of working capital to meet its anticipated future needs. If this is not done properly, the organization will be unable to meet its liabilities as they fall due. This is a situation where the relevant organization is said to be technically insolvent. The amount of working capital required by an organization will depend on many factors like the type of business activity, credit policy of the organization, promotional activities, time period of the year and many others. In uncertain conditions, organizations must hold a minimal level of cash and inventories based of expected revenue. An additional safety buffer should also be added to this amount.

MAKING THE BUSINESS PROFITABLE

Some people are concerned when they find out that we are a profit-making business. Some people even denounce us, because they believe that profit is evil.

Why A Business Must Be Profitable by Frederick Mann (edited) Some people are concerned when they find out that we are a profit-making business. Some people even denounce us, because they believe that profit is evil. We do our best to provide our customers and the world in general with value. Many of our customers apply the information they purchase from us to save money, to make more money, and to improve their lives in many ways. We believe that the quality of our information is such that most of our customers receive more in value than they pay for our information. We attempt to have win-win transactions with our customers. Profits and losses are indications of whether we're doing the right things or not. It's how the people in the marketplace tell a business what is needed and wanted, what should be eliminated, what should be expanded, what needs to be improved, etc. Profits and losses constitute important feedback that improves economic efficiency. Profits also enable us to grow. If what we're doing is good, then we need to grow so we can do more good. If we don't make profits, then there's something wrong with what we're doing, and we deserve to go out of business. Why profits are good and why they work. Some time ago I visited Albuquerque, NM. On the eastern outskirts of the city is the longest cable car in the world. I took the ride to the top of the mountain. As I was going up I wondered: "Why is this cable car here? What useful purpose does it really serve? Why is it possible for people to spend time and money riding up and down the mountain in this cable car? How can they afford it?" Theres something very important here to think about. The reason we can do all these things build and ride in cable cars, go to the movies, play golf, watch football, etc. that on the face of it dont seem very productive, is that someone is producing more than they consume. Most fundamentally, profit is the difference between whats being produced and whats being consumed surplus production. Therefore profit is a very noble value. All our buildings, roads, communication systems, computers, and other manifestations of advanced civilization came about because some people produced more than they consumed; they made a profit. Another major implication of surplus production or profit is that the economy isnt a zero-sum game. Its an expanding pie. So the fact that you make a profit means youre expanding the pie. Because of this, you can enjoy guilt-free success by producing more than you consume; you dont have to "steal" success. (See Report #13A: The Millionaire's Secret (I), for a detailed description of these things.) The following article tells you more about why it's necessary to make profits. MAKE A PROFIT OR DIE by Harold Porter There are LAWS in the universe. Some people elect "legislators" to "represent" them in Washington (or somewhere). These "legis-lators" have in that title the two Latin words: legis meaning "law" and lator meaning "proposer." The "laws" they propose are not LAWS; they are the momentary whims of the "proposers" (or the "people"). They are elected to "make laws" and - darn it - they do! Twenty-five years ago I became concerned that we were losing our freedoms in the USA as a result of those well-meaning (?) legislators. I began a search to find a country that was free. That search ended with the belief that the USA was one of the freest on Earth. Bad as it is, it's the best available. Following that pitiful search, I became involved with a venture to start a new country. In blissful ignorance, I thought that a beautiful tropical island, good principles, enthusiastic people, grit, determination, and great ethics would create a paradise that couldn't fall. To my consternation, I discovered that the organization of the country included no technique for generating profit. Failure to generate a profit will inevitably result in failure of the organization. Great surprise! After that loss of emotion, money, time, friends, and - very nearly - the loss of my life, I began to understand how little I understood about the LAWS of the universe concerning the rise and fall of organizations ... countries included. As a generalized principle: All Organisms Must Show a Profit - Or Die Examples abound. They include all life, from the smallest amoeba to the largest star.

Entropy is a word physicists use to describe the concept that unrecoverable losses occur in any closed system; that the system "runs down" as time passes. A thermodynamicist uses the "second law" [of thermodynamics] to describe the same phenomenon. The vulgar express the same idea with fewer words on a bumper sticker: "Shit happens." We all know - intuitively - that things need lubrication, paint, maintenance, and replacement or they will fray, deteriorate, wear out, or plain "break." This is a LAW. Where does one get the resources for maintenance? If a system simply "breaks even," there is no available source for counteracting entropy. Only if one creates more than that which is necessary to "function" - a "profit" - are there assets which can be used for upkeep. Yet some people see "profits" as evil. Ants - yes, I mean the little buggers in the garden - know enough to produce profits. Yet people occasionally, and mistakenly, think that profits are an unnecessary function, and are somehow sinister. Whales and sea lions store fat. Potato plants produce tubers. Grasses make rhizomes, dogs bury bones, squirrels cache nuts, woodpeckers store seeds, ... Yet humans are so "smart" they make claims to the contrary. In all of life, profit yields success and failure to make a profit results in death. John Scarne wrote "The Bible" on gambling. In it he spends a lot of time telling people that "the house" is going to win because they've stacked the odds in their favor. Scarne spends many pages showing "the uninitiated" that even if the odds were "even," you still wouldn't win because your "bank" is so much smaller than that of the casino. His point is that strings-of-losses occur and when you can't cover the losses you leave the table with less money than you had when you arrived. Good point! You must show a profit! In business, the difference between phenomenal success and dismal failure is often tiny. As a percentage, it is almost always less than ten percent, and is regularly less than five percent. There are charlatans who say things like: "General Motors made two-hundred-million dollars last year. They can afford to give us a 7% raise." These people don't understand that one year of profit means little to the life or death of an organization. They don't understand that the profit-ratio (= 0.002 in this hypothetical case) is so tiny that the organism could die with the first tiny fluctuation of the market. Some years ago NASA asked the question, "We can usually recognize life on Earth. How would we recognize life on another world?" The most reliable answer was: "Look for something that has processes running in the opposite direction of entropy." Among humans, the exceptions to the principle are almost always non-voluntary. States support themselves by theft. Religious organizations usually support themselves by threats, often hidden as "you won't get into heaven" or some such. Most organizations find some technique for producing value and selling it at a profit; even the Sierra Club has found that it cannot live solely upon "mooch"ing; it makes money from selling calendars and other items - at a profit. Here are our best lessons and strategies for growing a business in the technology era that focuses on earnings and profitability 1. 2. If being a business person is not your goal find a business partner immediately. Without someone on the team that relishes sourcing customers, closing revenue deals, perfecting sales messages, it will always be an afterthought. Consult anyone you know that has run a earnings-based business (VC funded companies are rarely helpful here). The concerns of a restauranteur, law firm, or even landscapers are entirely applicable when it comes to long-term strategies for profitibility. Anyone running a business for years will know volumes about hiring, cashflow, and compensation. Spend your money when its in the bank, not when the deal is agreed to. To know what you actual profit margin is you must know both how much you made and how much it cost to provide. If you spend the money prematurely youre likely going to be spending more than you earned leaving yourself with a shameful net loss. Spend at least 50% of your time selling. Many technology companies assume if they built great product it will sell itself yet that almost never happens. Usually weve found that incorrect assumption is a rationalization of people who love building product, but secretly loathe the business side of running a business. Such a strategy is a great way to lose a lot of money. So constantly ask yourself, are we spending 50% of our time selling? I bet youll always realize youre focusing too much on the product and not enough on finding customers that want it. (Of course the inverse is true. If you love selling you need to make sure you spend at least 50% of your time building product or your sales effort will be for naught.) Know thy accounts! At any given moment know how much you have in the bank. Know your accounts payables and accounts receivables. Know your forecasted cashflow position. Know both your monthly finances in both GAAP and cash calculations. This is the only way to know how much you have to spend, and if you are truly in the black or misleading to yourself. Prove your revenue models before investing in them. Spending investor money on an assumed revenue stream is a very risky proposition. If at all possible prove that there is a firm, interested marketplace for your product before digging yourself into a hole you may never get out of. Dont lie to yourself. We find a lot of entrepreneurs practice their elevator and investor pitches for so long they believe their rosy sounding forecasts are actually going to happen. The only thing you know is what youve proven. Everything else are items that still need to be proven or listed as false starts. While its important to strive for the big potential, its critical you protect yourself against the much more likely realities. Fail fast. Find out what is going to fail as soon as possible. Every business person has been wrong. You will too. Get over it and be emotionally tied to nothing. The key is to find out what works without losing much money then youre in a much shallower hole to get out of. In fact you might find there is no reliable revenue for the product you are building and profitability would come sooner if you scrapped it and considered a new business

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Hire slow and fire fast. Training an employee that isnt going to be great is a tragic waste of money and time. Likewise, keeping an employee around that isnt excelling at their position loses you money every week you you do not replace them. So, take your time to find the great person and free your company of the person if it turns out they werent. If you ever find yourself saying Well this person isnt great, but we have to fill this position do not hire that person, they will never give the long-term benefit to compensate the short-term gain. Dont fill position simply because investors were promised growth. Be frugal about everything. Get the black and white printer instead of color. Skip the flat screen show-off TV. Buy used furniture and equipment. Rent office space by price not neighborhood. Get by with what you have. Until your bank account is growing consider every purchase above $50 as if it might break your business. curious thing happens to entrepreneurs in the spring of every year. You wake up one day and realize you had better figure out how much money was made last year in order to pay your taxes. But wait, shouldn't a business owner already know how much money he or she made last year, last quarter, or last month? Don't wait. Develop your financial plan today. If you don't keep track of how much money you're making, you have no idea whether your business is successful or not. You can't tell how well your marketing is working. You need to know what your net profit is. If you don't, there's no way you can know how to increase it. To be successful in business, you need to make a financial plan and check it against the facts on a monthly basis, then take immediate action to correct any problems. Here are 8 steps you should take: Create a Financial Plan: Estimate how much revenue you expect to bring in each month, and project what your expenses will be. If you need it, get help from business planning books, software, or an accountant. Review the Plan Monthly: Even if time is taken to prepare a financial plan with profit and loss projections, it often sits in a desk drawer. It's not enough to have a plan -- you have to review it regularly. Lost Profits Can't be Recovered: When comparing your projections to reality and finding earnings too low or expenses too high, the conclusion often is, "I'll make it up later." The problem is that you really can't make it up later; every month profits are too low is a month that is gone forever. Make Adjustments Right Away: If revenues are lower than expected, increase efforts in sales and marketing or look for ways to increase your rates. If overhead costs are too high, find ways to cut back. There are other businesses like yours around. What is their secret for operating profitably? Think Before you Spend: When considering any new business expense, including marketing and sales activities, evaluate the increased earnings you expect to bring in against its cost before you proceed to make a purchase. You can often increase your profitability simply by delaying expenses to a later month, quarter, or year. Don't be Afraid to Hire: Retailers and restaurateurs wouldn't consider operating without employees, but many service businesses limit themselves by being understaffed. Almost any business can benefit from hired or contracted help. You can better use your talents for generating revenue than for running errands and filing. Pay Yourself a Salary: If you are incorporated, you may already be doing this. If not, allocate an amount to owner's compensation on a monthly basis. Each month that your business meets its profitability goal, pay yourself the full amount. When you miss your target, dock your "pay" and when you exceed it, pay yourself a "bonus." Writing yourself a monthly paycheck will give you a strong incentive to keep your business profitable. It's About Profit, Not Revenue: It doesn't matter how many thousands of dollars you are bringing in each month if your expenses are almost as high, or higher. Many high-revenue businesses have gone under for this very reason -- don't be one of them.

How To Make A Profit In Business We all going into business to make money and keep what we make. How do we go from making money to making a profit? How do we stay competitive, increase our cash flow and become better at what we do? Here are some ideas for making a profit in your business venture. 1) Be great at what you do, by becoming the best in your business As an entrepreneur the more you know the better. What you know can help you make a profit. You have to have book sense, business sense and common sense working together to make and keep your profits in business. Book sense incorporates knowing everything there is to know about what you are selling, whether it is a product like web site design, food or gifts, or a service like hair styling, investing or moving company. The more you know about the service or product the more comfortable your investors will feel about giving you money. Your customers will trust and have confidence in you and prefer your service over another. Business sense will keep you in business and protect you from getting ripped off. It requires you to know the true cost of your supplies, so that you do not pay more than you have to. This is about you knowing where shop, what licenses you need so that you are legal and how to do things the right way. Common sense- you may be in situations where you are the youngest person in the room and may feel intimated, do not let your fear or intimidation stop you. If your common sense is telling you something is not right, it probably is not right and you need to trust what you know and make a decision to wait before making a move. Business education no longer requires costly, lengthy college courses. Many entrepreneurs who have been successful in their fields are writing books on how to start similar businesses. They are great sources of information. You can obtain information and training from a variety of sources such as: experts in the field, competitors, entrepreneurs training centers, seminars, conferences, and books. With the increase in entrepreneurship ventures access to training is readily available and affordable 2) Know who your customers are and fight to keep them

Why so many businesses fighting for the attention and patronage of your customer? Take the time to investigate your potential and current customers. Once you think you have found them, test the market and see if they buy the product. If they are not buying your product or making a sale is extremely difficult you wan to re-evaluate and go back to the drawing board and investigate some more. This will help you determine if your target is off or your strategy of reaching them is off. If you want to sell to the affluent your style, appearance, use of language will be much different from selling to middle class families. You must in these cases be able to relate to them and meet their concerns. Can a person on a shoestring budget reach the affluent and wealthy? Yes, if they are capable of finding a common ground in which they can use to build a relationship from and are able to meet the unique needs of that segment of the market. You can sell the same medicine to the wealthy and middle class, but your packaging and presentation will be entirely different. Some businesses think that once they have their customers, the work is done. Not so, this is just the beginning. You will find that some other entrepreneur is coming up right behind and is hungrier than you are, and ready to offer more for less. Your customers are never safe, which means you want to build and keep the relationships current and purposeful. This may mean sending your customers updates about how your company is doing, new product or service offerings. If there is nothing new going on in your business (which should not be) then you can send birthday cards and other items to let the customer know that you are thinking of them. Profitable businesses specialize in personalization. 3) Have a constant stream or method for recruiting new customers Have you ever seen a brook or river run dry? It is a sad sight, no longer is that brook good for giving water, oxygen or even a pleasing sight to on lookers. It becomes a hole in the ground collecting dirt and debris. Your business should never face the same fate, to avoid this you must keep the source full. Your source is the how you get new customers. As entrepreneurs we are so busy maintaining the business and running straight ahead that we do not focus the priorities. Never take your eyes off where your customers are coming from. Nurture and maintain your source for recruiting new customers. For example if your source is the relationships with vendors, stores, or magazines then maintain those relationships buy paying on time, responding to emergencies and meeting needs. If your source is referrals, then reward those who are referring customers to you. 4) Manage your income streams so that they do not run out Profitable businesses make sure that what they are putting out financially is being replenished by what is being brought in. Keep the rule of earning at least five dollars before you spend one. Two dollars are for paying expenses, one for replenishing supplies, one for advertising and the other for maintaining the payroll or the entrepreneur. There are so many needs for a small business and new business, from supplies to inventory. The needs seem to outweigh the provisions at times, yet we still need to be able to operate and function without breaking the bank. This is when you want to create your wish list, and your shopping list. As an entrepreneur we can live in the office supply stores and be roped in by vendors into buying equipment that takes classes and several months to master. To get overhead low you must manage you income streams making a budget for all your expense and needs. This can be achieved by dividing the money coming into your business to make it pay for the preset priorities. Determine your bills, expenses and business equipment or operations needs. Give a date to purchase each items by and do not buy anything until you have collected the necessary money for it. If you are going to lease equipment have a stream of income that will support this new expense so that your payments are on time and your credit is being built up. To often home businesses and store fronts are both guilt of spending what they have not made and drying up the income streams. Anything not being replenished at the same rate it is being used is in danger of drying up quickly. 5) Charge what the service is worth It is important to the profitability of your business that you charge what your service or product is worth. Then it will take a shorter time to see profits. If you undercharge then making a profit takes a lot longer and much more effort. Price right the first time so that you are meeting your expenses and have money for savings or reinvesting. Charging the right price will set your business in motion and head on the right path.

Article Source: http://EzineArticles.com/637179

I know, I know Im so cliched with my ideas of profitability. I mean, who wants to build a profitable business while a bubble is brewing in silicon valley? Just raise boat loads of money on convertible notes, then fill the empty pool in the back of your Palo Alto crash pad with it and jump in. Silly profitability But, for those of you not so lucky as to raise $41 million dollars pre-launch (or those so lucky, depending on your rationale) theres always the boring, old idea of building a business focused on profitability from the starting gate and making money that way. Not as sexy, I know, but the feeling of dollar bills earned vs. dollars given with strings has always felt different between my grubby little fingers. Im not saying that lots of companys who have raised money arent insanely profitable Im just saying that from the get go you must focus on profitability, letting things like funding just be a building block to your lego castle. So, if youre interested in building a profitable business while you create the next big virtual startup I suggest you take a gander at these 21 tips that will help you reach profitability and stay there. 1. Build something great, then sell it. One of the most memorable concepts I took from my time at the Founder Institute was something Phil Libin (CEO at Evernote) said to the class. He explained that the best way to create a great business is to simply build something

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great and then sell it. Simple, but oh so true. This works like a charm unless you dont think your product is great (which means its time to reconsider) or you think its great but dont know how to sell it (meaning its time to become an student of salesmanship). Go Lean. Building a lean startup (or business for that matter) is a good idea and deceptively simple to implement. Going lean can be anything from using a co-working space, to recruiting your kids to pack boxes of product (see: child labor laws first). Eric Reiss explains it the best in his post entitled appropriately enough The Lean Startup and if you really absorb his message it can help you substantially cut back on the money & time it takes to get to profitability. No free lunch. As we enter the heyday of Facebook and other mega-social-free sites its so tempting to build a company that offers everything free and think Ill figure out the profit model later. Thats not a bad idea if youre one of the few Mark Zuckerbergs out there or have previously cut your teeth as a successful entrepreneur. But, if youre like most people and this is your first hoorah rationale suggests you build a business with a clear profit model in place before you even hit the ground running. Note: an example of free and very profitable going together would be the guys from FreetheApps.com I recently did an interview with one of the cofounders and he explains how to make 6 figures a month (of profit) from being free check it out here. Delegate. You only have so many hours in the day and often the majority of them go to tasks that someone else could be handling for you (think: research, webmaster stuff, organization and other misc. tasks). Its very important as a scrappy entrepreneur who craves profitability to know how much your time is worth and what you need to be delegating. Say youre time is worth $100 an hour, if you spend 3 hours a day on email, research, booking trips and fighting with Southwest over luggage they destroyed (happened to me at SXSW) youre losing $300. Better to delegate those tasks to a virtual assistant for $6 an hour. The benefits of delegation are exponential. Co-work. Shortly Ill be on the search for a co-working space in San Francisco for a few a hundred bucks a month I can get a great working environment (plus all black and white prints my little heart desires) versus spending thousands on an office or struggle to remain on task working out of my house. Another VERY cheap alternative to a co-working space is Starbucks, something Ive used profusely as a place to work from anywhere in the country (or World for that matter). Free wi-fi, dependable hours and service all for just a few bucks a day.