working capital policies (good and poor)
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Provide at least two examples of organizations that have good working capital management policies, and two examples of organizations with poor working capital management policies. Please explain why the policies of your selected organizations are effective or ineffective. I chose these four companies, Microsoft, Apple, Hewlett-Packard and IBM, can you please response to the above questions on capital management policies good and poor, of the four chosen I am not sure if any qualify as poor, if not could you suggest, and please let me know how to read the balance sheet to see how compaies working capital management is achived.
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Solution Summary
This solution is comprised of detailed explanation of good and poor working capital management policies. Analysis of two examples of organizations with poor working capital management policies and two with good working capital management policies are also included.
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Working capital refers to current assets used in the business operations. The management of working capital involves managing the relationship between all items in the business' current assets and current liabilities. These include inventories, accounts receivable, payable, and cash. This management is important so that the company can see whether it has sufficient cash flow to continue its operations and to pay its short-term debts as they fall due. That is why working capital management has become increasingly important in the current business environment.
One measurement that we can use to measure how good an organization's working capital management, is through its cash conversion cycle (CCC). CCC is the "length of time funds are tied up between paying for working capital and collecting cash from the sale of the working capital" (Brigham & Houston, 2007, p. 513). CCC is inventory conversion period plus average collection period minus payables deferral period. The inventory conversion period is the length of time a business takes to sell the merchandise. The average collection period (ACP) is the length of time it takes for customers to pay for goods they purchased on credit. The payable deferral period is the length of time the business's suppliers gives to the business to pay for its purchases.
Two organizations that have poor working capital management policies are Microsoft Corporation (MSFT) and Apple Inc. (AAPL). Bellow are data from Microsoft Corporation (MSFT) and Apple Inc.'s (AAPL) 2008 financial statement (balance sheet and income statement) (Yahoo Finance, 2009).
Microsoft Corporation (MSFT)
Annual sales: $60,420,000
Cost of goods sold: $11,598,000
Inventories: $985,000
Accounts receivable: $15,606,000
Accounts payable: $12,830,000
Inventory conversion period = ...
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