Working capital is a measure of liquidity. Through working capital measurement, one is able to ascertain a company’s both financial health and short-term efficiency. Working Capital is calculated by subtracting the organization's current liabilities from its current assets. Also known as the working capital this ratio is able to portray the ability of a company to cover its short-term debts. The working capital can be a positive or a negative number; a positive number indicates good financial health and the company can adequately cover its short-term obligations while a negative figure indicates that the company is struggling to meet its short-term obligations and may run into issues such as paying creditors. Additionally, a constant negative working capital is a red flag that indicates inherent bankruptcy for the company in question. The working capital ratio derived from taking the current assets divided by the current liabilities. A ratio of 1.0 indicates that the current assets match the current liabilities of the company (Finance, 2003). While his ratio indicates that the company can adequately provide for its short-term liabilities should they arise, financial experts advocate for a value higher than 1.0 depicting that the company will have some capital left over even after paying all its current liabilities. Having that little bit in excess of the 1.0 ratio cushions against any unforeseen expenses. A working capital ratio of between 1.2 to 2.0 is considered ideal and gives a positive indication of the company’s ability to pay debts and overall financial health. However, in as much as high working capital is preferred, too much is not always good as it denotes inefficiency in resource use. This inexplicably means that the organization has a lot of idle cash that would have otherwise been used in investment or business growth.
For the Apple Company, the working capital for the last five years has been positive. The figures from 2011- 2015 are as follows 17.018, 19.111, 29.628, 5.083 and 8.768 ("Morningstar – Independent Investment Research," n.d.). Evidently from the data the working capital of Apple has been on a steady decline. This information is not sufficient as it cannot help the organization in assessing whether the financials are healthy or not. The working capital ratio is 1.6 for 2011, 1.5 for 2012, 1.7 for 2013, 1.1 for 2014 and 1.1 for 2015. While the actual working capital has been declining steadily, the ratio indicates that the business is fairly healthy except for the last two years where the working capital ratio has exceeded 1.0 by a small margin. In this respect, the organization may seek to increase this ratio in order to maintain sound financial health. The low working capital ratio, however, dos not expressly imply that Apple company is facing financial trouble. The company has just opted to operate at a low working capital in order to finance so that the cash can be used for profitable business operations and investment. As observed from their cash flow statement the income from sales or maturities of investments has been on the increase. The figures were increasing from 69,853 USD in 2011 to 126,389 USD in 2015.
For the current Income statement, the revenue for Apple company stands at $233,715. A 20% increase forecast for the next year brings the revenue to $280,458. As a result of this, the cost of revenue will increase in the same proportion as the costs are directly proportional to the sales. Consequently, the gross profit will maintain the same ratio of increase. The operating expenses can be broken into fixed and variable costs in order to determine the incremental costs and the stationary costs. Simultaneously, variable costs associated with the product sale will increase by 20% while fixed costs will maintain last year’s figure. Assuming that the operation expenses values do not change the net Income will increase as a result of the 20% increase in sales. In addition, it should also be noted that the 20% increase will also have a substantial impact on the working capital of Apple Company. The revenue will be recognized as a current asset in the balance sheet if the goods were bought by cash. This will overstate the current assets increasing the net working capital as a result because the net liabilities will remain constant.
Typically, organizations will want to operate on a low working capital in order to fund worthwhile investments. However, in order to decrease the working capital even further, Apple Company can utilize the following strategies, an extension of the payment terms of accounts payable. Apple Company can choose to extend their bill for their suppliers, purchase for raw materials and other utilities. This way the company will able to use their suppliers leverage in order to reduce further their working capital. In addition to this policy, Apple Company can also reduce the inventories that are at their disposal. Inventory is an asset that comes along with increased costs before its actual sale and by reducing on the same the company will be able to reduce of money for production before revenue from the sales is realized. Finally, Apple Company can seek to improve its collection cycle in order to retrieve compensation from customers faster. Although the aggressive collection can have adverse implications following up on felonious accounts can be helpful to the company.
References
Finance, I. D. O. (2003). Working capital. International Dictionary of Finance, 4th Edition. http://doi.org/10.1007/SpringerReference_2833
Morningstar – Independent Investment Research. (n.d.). Retrieved from http://www.morningstar.com
