Provide 1 response to each student post. Each response should be 150 words each. Turnitin and Waypoint is being used to check for plagiarism and Please use APA format. Please pay close attention to plagiarism, and it's not tolerated.
7:05am Jul 17 at 7:05am
Marcus,
In a business, its working capital is used for day-to-day operational expenses such as payroll, costs of procuring, storage, and management of inventory. Working capital will also come into use when there is an introduction of new products. New products will require a working capital investment equal to 25% of sales to support its introduction (Byrd, Hickman, and McPherson, 2013). Also, short-term lenders want to see a business generating a positive flow of cash which will indicate to them that the company is in good financial health. I agree with you that most companies cannot operate with no current liabilities and it would be that smart to do it. It is not typical because the time value of money prompts companies to invest their cash reserves (The Financial Press, 2009, para. 2). Smarter to invest their money and let it make additional capital.
References
Byrd, J., Hickman, K., & McPherson, M. (2013).
Managerial Finance
[Electronic version]. Retrieved from https://content.ashford.edu/
The Financial Press. (2009, March 21). Can a Company Operate Without Current Liabilities? Retrieved from https://thefinancepress.blogspot.com/2009/03/can-company-operate-without-current.html
9:37am Jul 17 at 9:37am
How should a business use working capital analysis?
Per Bragg (2018) working capital analysis is the process in which an organization compares current assets to current liabilities, assisting in the determination how they organization should proceed with funding operations and possible investments. Working capital is used to fund the day to day operations keeping the business afloat. In other words, working capital analysis is required for organizations to understand if they can afford to do business. I did find it interesting per Biery (2013) that organizations are taking loans in order to free capital up and for other capital needs. Even with low interest rates, I feel that this creates or starts a trend that could be determinate for a business in the long run.
Which is more important to the short-term lender: the stock of cash or the flow of cash?
I believe the most important aspect for a short-term lender would be the flow of cash. As a lender would want to know the amount of cash coming and going out to determine whether or not to finance, and what amount. On the other hand, Byrd, Hickman, and McPherson (2013) states that the main reasons small businesses fail is lack of a cash cushion. With that being said the cycle is still going be the most important aspect for short-term lenders.
Is it possible in today's business to operate with no current liabilities?
Simply put, no.
Current liabilities include but are not limited to things like payroll, accounts payable (bills/invoices), income tax, and short-term loans. I can not think of one business scenario where this is an option. All industries have employees even if that employee is the owner operator. Accounts payable would be electric bill, water bill, rent, and phone bills. A business could have one or all of these, meaning it is not possible in todays business world to not have current liabilities. Maybe 50 years from now?
Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance [Electronic version]. Retrieved from
https://content.ashford.edu/Links to an external site.
Biery, M. E. (2013, April 12). Businesses Seeking Working Capital--Survey. Retrieved from
https://www.forbes.com/sites/sageworks/2013/04/12/businesses-seeking-working-capital-survey/#348f2bf434bbLinks to an external site.
Bragg, S. (2018, May 17). Working capital analysis. Retrieved from
https://www.accountingtools.com/articles/working-capital-analysis.htmlLinks to an external site.