Week 3 Discussion 1 & 2 Response

BUS592 Week 3 - Discussion Forum 1 Response

Guided Response: Review the posts from your classmates and respond to at least two. Compare and contrast the points you and your classmates made regarding the role of working capital in financial decision making and strategic planning. Each response should have a minimum of 100 words.

Below are two of my classmates that need response to their discussion. They are Nichole Mitchell and Iftear Naser

Nichole Mitchell

Working capital refers to how companies manage their current assets, and it is important because current assets are always changing. Current assets can help support a company’s growth, but they are not always enough during times of rapid growth. One aspect of working capital management is how companies use current assets to finance growth. Regardless of the company’s position or goals, it is important for its leaders to know how much cash they have on hand so that they can make informed, responsible decisions. Based on the company’s needs and goals, leadership can use working capital management to put assets to use and to determine if they should finance and how (Block, et al., 2019).

 

John Deere 2018
Current Assets (in millions)
Cash and cash equivalents	$3,483.70
Marketable securities	$545.10
Receivables from unconsolidated affiliates	$34.10
Trade accounts and notes receivable	$7,519.30
Financing receivables - net	$25,870.30
Financing receivables securitized - net	$4,813.60
Other Receivables	$1,477.70
Equipment on operating leases - net	$7,039.90
Inventories	$7,160.90
Total Current Assets	$57,944.60
Current Liabilities (in millions)
Short-term borrowings	$11,761.80
Short-term securitization borrowings	$4,702.20
Payables to unconsolidated affiliates	$199.50
Accounts payable and accrued expenses	$9,625.80
Total Current Liabilities	$26,289.30
Net Working Capital	$31,655.30

 

Based on John Deere’s balance sheet for Q2 of 2019, they have a significant amount of working capital at their disposal. According to Block, et al. (2019), manufacturing can be seasonal, so it makes sense that Deere keeps a fair amount of cash on hand to cover slower periods. The financial summary indicated that there is increasing uncertainty in the agriculture industry that may cause sales to remain flat or slightly elevated. For this reason, I would not expect a robust short-term financing plan, as Deere is not likely to experience rapid growth. It makes sense that current assets are greater than current liabilities.

 

Short-term liabilities make up a little less than half of Deere’s total liabilities. Because the financial summary expressed that sales are only projected to increase by 5%, a large amount of short-term financing may not be necessary. Long-term financing may be attractive to Deere because it allows the company to pay its debts over an extended period of time, however, rising interest rates will increase the overall cost of financing and may hurt the company in the long run.

 

References

Block, S. B., Hirt, G. A., & Danielson, B. R. (2019). Foundations of financial management (17th ed.). Retrieved from https://www.vitalsource.com/

John Deere. (n.d.). Investor relations (Links to an external site.). Retrieved from https://investor.deere.com

Iftear Naser

 

Short term borrowings                                        $11,761.80

Short term securitization borrowings       $4,702.20

Payables to unconsolidated affiliates        $199.50

Accounts payable and accrued expense  $9,625.80

Long term borrowings                                        $28,255.40

Total Liabilities                                                        $60,791.30

Total Assets                                                               $72,729.60

Working Capital                                                     $11,938.30   ($72,729.60 - $60,791.30)

 

In order for Deere & Company to increase their profits they need to minimize their liabilities. As it stands, they are yielding a lower profit margin because of their high liability expense. If they are able to minimize their short-term liabilities, they will be able to increase their earnings in the near future and although they do have high long term borrowings, they will have more time to pay it back so it wont be as detrimental to their working capital. Increasing interest rates would impact their long term borrowings because this borrowed amount does not have the liquidity as the short term borrowings as mentioned in the liquidity premium theory (Block, Hirt, & Danielson. 2019). As a result, they will owe more in the long run with their high long term borrowings. Increasing interest rates in the short term will also impact many of the decisions made by management because this will affect the amount of working capital they have.

 

Resources

Block, S. B., Hirt, G. A., & Danielsen, B. R. (2019). Foundations of financial management. New York: Irwin. (17th ed.). Retrieved from https://www.vitalsource.com/ (Links to an external site.)

John Deere. (n.d.). Investor relations (Links to an external site.). Retrieved from https://investor.deere.com