Thursday, November 7, 2019
Working Capital and Financial Environment Essays
Working Capital and Financial Environment Essays Working Capital and Financial Environment Essay Working Capital and Financial Environment Essay Imagine the way Amazon.com, the most successful e-company besides e-Bay, financing their operation. In the end of 90s, the Amazon.com have been known as a huge online book stores worldwide although we got surprised to see that the company continued recording financial losses for several years. The way the company could resist despite the losing strict is because Amazon’s strong financial strategy that known as budgeting and forecasting. The reason of conducting budgeting is to anticipate times when a business needs to incur a great amount of expenditure before the company harvests the profits. Any shortage of cash will put the company in a dangerous situation. Furthermore, this situation highlights the needs of providing enough working capital for a company to fund their day-to-day activities. The appropriate working capital also helps the company to finance their product and services improvement, technological invention, network expansion, and so many other things that help them to strengthen their presence and hence position in the markets. Concerning the issue, this paper will elaborate the working capital, intermediaries, and control programs in two companies: Walmart and Target. 2.                 Elements of working Capital As explained above, company needs to provide enough working capital to ensure that the company is able to finance their activities. The main sources of working capital are the current assets since this kind of assets are short-term in nature so that a company could convert this capital easily into cash (Working Capital,†n.d.). In addition to current assets, the company also has current liabilities as the results of the company expenses when investing some machines or gadgets to help the company conduct their activities.  Therefore, a company’s working capital can be written as following: Working Capital      = Current Assets – Current Liabilities In which current assets equals to stock + debtors + cash In order to ensure that a company could finance their activities appropriately while preventing the company from financial collapse, therefore, they need to plan careful plan their capital structure, which long-term financing of a company such as long-term debt, common stock and preferred stock, and retained earnings. It differs from financial structure, which includes short-term debt and accounts payable and the issuance of the most basic and important instruments such as stocks or bonds (Investor Words, 2009; Harvey, n.d.). In the 2009 annual report of Walmart, it is revealed that the working capital of Walmart shows their current liabilities far exceed the current assets by $4.0 billion since the company reduces the commercial paper outstanding. In addition, the company ratio of current assets to current liabilities was 0.9 at January 2009 and was 0.8 at January 31, 2008. Walmart also describes that they have working capital deficit because of efficient use of cash in funding operations. The deficits are also the results of provision of shareholders returns in the form of stock repurchases and dividend payments. Meanwhile for Target, the company decides to increase the working capital especially in the yearend, which the company promises to peak the sales during the period. Unlike Walmart that reduce the operating costs, Target increases their working capitals through operating cash-flow and short-term borrowings. 3.                 Functions of intermediaries and financial regulatory bodies Financial institutions compose of several institutions such as banks, credit unions, insurance companies, mutual funds, and other financial intermediaries. The existence of the institutions aimed at providing bridge of or channeling funds from those people/organizations who have surplus funds to those with shortage ones. Among intermediaries that companies use usually banks and securities that have function as mediators from those who act as the borrower and the lender of capital. At Walmart, the role of financial intermediaries represent is indispensable as the company has short-term borrowings consisting of $1.5 billion and $5.0 billion of commercial paper. In total, the company has particular lines of credits amounting $10.2 billions from 29 financial institutions. Table 1          Commercial paper and long-term debt of Walmart Meanwhile for Target, the use of financial intermediaries is also important as the company can continue their operations and growth by using the debt financing in addition to internally generated funds. 4.                 Importance of control programs and effective internal control techniques In July 30, 2002, the United States government enacted the Sarbanes-Oxley Act of 2002 in response to the worrisome crisis of trust generated by major corporate and accounting scandals. There are debates regarding the costs and benefits of the Act and how it really affected American businesses. The objective of Sarbanes-Oxley law is to enhance internal control qualities and capabilities of public companies in the U.S. The role internal control has been one of the most frequently discussed issue in the regulatory environment, following the accounting scandals that occur in several large companies in the U.S. Therefore, internal controls are responsible in protecting the organization’s resources, and resources of its partners and clients (Kohn, 2004). In short, the Sarbanes-Oxley Act of 2002 was designed to enhance the qualities and capabilities of internal control, thus preventing corporate failures mentioned previously from becoming ‘common corporate practices’. Besides protecting corporate assets, the Sarbanes-Oxley Act has its usefulness in several levels of corporate management. In the organizational level, the Sarbanes-Oxley Act uses internal controls to enhance the reliability of financial reporting, the delivery of timely feedback in the process of achieving operational or strategic goals, and the compliance to laws and regulations. At Walmart, the role of internal control is also indispensable as the company has listed their share in stock exchange in which it would increase the investors’ belief over the company’s operations. In their 2009 annual report, the company reveals that in order to comply with the requirements of Public Company Accounting Oversight Board (United States), Wal-Mart stores set up internal control based on the criteria issued by the Committee of Sponsoring Organizations of Treadway Commission. At Target, the role of internal control is also indispensable as the company decides to provide the comprehensive systems of internal control that would lead to reasonable assets assurances. In addition the Audit Committees also pay attention to the system of internal control that consists of accounting practices, financial reporting, and audits to ensure that they are sufficient to protect the shareholders’ investments.
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