Clint Jan Salvaña

2012-51494

Evaluation of the Working Capital Management Practices of

English Knowledge Awareness, Inc. (EKA)

Introduction

Working capital management plays an important role in the sustainability and survival of

a business. Effective utilization of the assets in contrast to the liabilities of a business will give a

competitive advantage for a business. This concept lies in the idea governing the equation of

solving working capital. Working capital which measures a company’s capability to pay its current

obligations is given by the equation: Working Capital = Current assets – Current liabilities. A

positive working capital balance means current assets cover current liabilities while a negative

working capital balance means current liabilities are more than current assets.

One possible worst-case scenario that may happen due to ineffective management of

working capital is business closure because of bankruptcy. The business might run into trouble of

paying back their creditors in the short term. Though, it is always not the case. Management should

be very careful when looking at working capital because this can be inflated by useless current

assets. A badly managed company often allows poor-quality receivables or obsolete inventories to

build up so that its working capital appears strong.

Now, we will be looking at the working capital management of English Knowledge

Awareness, Inc. (EKA). We will be utilizing the guide question: What are the issues and concerns
affecting the working capital management practices of the selected subject entity? to gain a deeper

insight of the working capital management of EKA.

Analysis

To really understand how EKA is managing their business’s working capital, we need to

analyze and look at their current assets and current liabilities which are listed on the balance sheet.

We also need to analyze how EKA’s management of its working capital affected its revenue by

looking through its Income Statement. Here is a snapshot of EKA’s Income Statement and Balance

Sheet:

Income statement
12/31/2016 12/31/2015 12/31/2014 12/31/2013
2,769,182.00 2,179,731.00 2,075,934.00 575,552.00
Revenue
Less: Operating Expenses 2,696,622.00 2,109,491.00 2,012,060.00 524,312.00
Profit Before Tax 72,560.00 70,240.00 63,874.00 51,240.00
Net Income 65,304.00 63,216.00 57,487.00 46,116.00

Balance Sheet
12/31/2016 12/31/2015 12/31/2014 12/31/2013
Assets
Cash 145,632.00 125,634.00 102,646.00 364,604.00
A/R 3,624,562.00 3,472,510.00 3,386,827.00 2,601,704.00
Inventory 59,456.00 48,521.00 59,113.00 223,547.00
Total CA 3,829,650.00 3,646,665.00 3,548,586.00 3,189,855.00
PPE 635,958.00 690,094.00 744,230.00 446,100.00
Total Assets 4,465,608.00 4,336,759.00 4,292,816.00 3,635,955.00
Liabilities and Equity
Current Liabilities 1,274,105.00 1,215,862.00 1,239,496.00 642,406.00
Unearned Revenue 15,634.00 10,564.00 6,840.00 5,819.00
Income Tax Payable 7,256.00 7,024.00 6,387.00 5,124.00
Total CL 1,296,995.00 1,233,450.00 1,252,723.00 653,349.00
Equity 3,168,613.00 3,103,309.00 3,040,093.00 2,982,606.00
Total Liabilities & Equity 4,465,608.00 4,336,759.00 4,292,816.00 3,635,955.00
 By utilizing and analyzing the income statement and balance sheet, different insights

towards the businesses’ performance can be obtained. The table below summarized the working

capital of EKA from December of 2013 to December of 2016. The working capital was calculated

based on the equation mentioned. Apart from solving the working capital of EKA, its Working

Capital Ratio was also calculated. The working capital ratio or also known as the Current Ratio is

given by the equation: Working Capital Ratio/ Current Ratio = Current Assets/Current Liabilities.

This ratio shows the relationship between current assets and current liabilities. It also indicates

whether a company has enough short-term assets to cover its short-term debt. It is said that

anything below 1 indicates a negative working capital while anything over 2 means that the

company is not investing excess assets. According to an article from Investopedia, most believed

that a ratio between 1.2 and 2.0 is sufficient and a ratio of 2.0 or better is considered good.

The table below shows the different analyses done using the Income Statement and Balance

Sheet of EKA. The analyses consisted of the calculated working capital and working capital ratio

and the calculated improvements of working capital and revenue in values and percentages.

Working Capital and Working Capital Ratio

12/31/2016 12/31/2015 12/31/2014 12/31/2013

Working Capital 2,532,655.00 2,413,215.00 2,295,863.00 2,536,506.00

Working Capital Ratio 2.95 2.96 2.83 4.88

Working Capital Improvement

12/31/2016 12/31/2015 12/31/2014

Working Capital Improvement 119,440.00 117,352.00 (240,643.00)

Working Capital Improvement in Percentage 4.95% 5.11% -9.49%

 Revenue Improvement

12/31/2016 12/31/2015 12/31/2014

Revenue Improvement 589,451.00 103,797.00 1,500,382.00

Revenue Improvement in Percentage 27.04% 5.00% 260.69%

From the analyses we have seen that the working capital improvement for EKA fluctuates

from 2014 to 2016. We can see a positive working capital for all those years. A positive improved

working capital was calculated for 2016 and 2015 while a negative improved working capital in

2014. It is said that working capital should grow at about the same rate as the revenue to represents

good financial management. This is the case of EKA, their revenue improvement in 2016 and

working capital has the same rate of growth. Though, a significant decrease was seen in 2016 they

were able to regain the business and have attributed to a growing revenue and working capital.

Discussion

Based on the analyses from the Income Statement and Balance Sheet of EKA, there are

fluctuations on the working capital and revenue generated. Now, in relation to these findings and

the operations of EKA we can find and connect the underlying issues and concerns affecting to the

differences and fluctuations from year to year.

The of cash flow of EKA in 2013 has decreased because of the additional property and

equipment bought at a total worth of PhP 352,266. In 2013-2014, there is a 18% increase in

unearned revenue. This poor collection performance has affected their cash flow. It was in 2014

that they incurred a high current liability of PhP 1,252,723.00. This high liability has continued

until 2015 and 2016. Since this is a current liability, it should have been paid within the year.

However, they could not pay their liabilities because they were not able to collect their receivables.
 The trend of increasing liability of EKA can be attributed to the leeway that they give to

students. Although they have a no permit no exam policy, most of the time this is not followed

because EKA still considers students to take examinations even without payment. During my

interview, they said that they sympathize to students who could not pay tuition fees that is why

they just allow them to take the exams. However, students would not be able to enroll in the next

semester or get their school documents especially the transcript of records, unless their balance

has been paid but they are still not that strict with this implementation.

This operational constraint that happened with EKA was all attributed to how the

management deals with their cash flows and liabilities which are essential part of working capital.

Conclusion

The basic objective of working capital management is to really minimize cost to the

business whether managing cash, receivables or inventory or miscellaneous current assets,

minimize risk to the company on receivables, ensure just level of inventory to operate full level of

capacity with minimum inventory. It also implies that as far as possible, miscellaneous current

assets should be utilized for company’s operations. In other words, the working capital

management should aim to optimize production and sales with minimum risk and cost. Overall,

management should really be careful when looking at working capital because this can be inflated

by useless current assets and on how they deal with the different aspects affecting working capital.

Reference:

Gorman, T. (2011). A complete idiot’s guide to MBA basics. DK Publishing.

Working capital. Retrieved from https://www.investopedia.com/terms/w/workingcapital.asp