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Breaking into Wallstreet - Essay Example

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This essay "Breaking into Wallstreet" discusses working capital as a simple financial metric that is sometimes hard to understand if you look at it from an accounting perspective. The working capital of companies varies depending on the industry in which the company operates…
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Breaking into Wallstreet
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Extract of sample "Breaking into Wallstreet"

The working capital of the three companies are illustrated in the table below:

Company

 

Wal-Mart

-S1695 million

Amazon

$l464 million

Salesforce

$105 million

 

The three figures are much different and based on a novice analyzing these numbers one would think that Wal-Mart has liquidity problems, but they don't. When looking at working capital figures the importance is the changes in this metric from year to year. The accounting formula for working capital is a little deceiving because it includes items that do not affect the current operating assets that influence working capital in the cash flow statement of a company. Cash and debt should not be included because they are not operational items. Debt is included in the financing sections of the cash flow statement, while cash is enumerated at the bottom of the cash flow statement. In terms of current assets, the three that are most important items are account receivables, inventory, and prepaid expenses. If these items go up the cash position of the firm is impacted negatively. From a debt perspective, the three most important items are deferred revenue, accounts payable, and accrued liabilities. These debt accounts when they go up increase the amount of cash of the company. Current assets should exclude cash, while current liabilities should exclude debt.

            The inventory account is very important because the firm is paying cash upfront to acquire that inventory. The main reason why the Wal-Mart working capital was bad was due to the huge amount of inventory that this company has to incur. Waiting too long for account receivables payment is also a reason for bad working capital results. If the change in working capital is positive it means that current assets are going up faster than current liabilities. One of the reasons that Salesforce's working capital was good was because they were collecting a lot of cash upfront. Delaying payments to suppliers can increase working capital, but this is a risky strategy that can negatively impact the credit rating of a company. The working capital metric should also be analyzed by a company as a percentage of revenue or other metrics. In the case of Wal-Mart, their working capital is only -0.4% of revenues. Wal-Mart has high inventory, but they offset that account by paying their account payable relatively late to keep more cash on hand. The company requires additional cash to keep growing due to its high inventory requirements.

 

 

 

 

 

 

 

 

 

 

 

 

 

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