Capital management is very important to ensuring business growth and longevity.
Capital management is very important to ensuring business growth and longevity.
Capital management is very important to ensuring business growth and longevity. There is a duality in all things and business is no different; managing capital and anticipating market demands is a key aspect to maintaining proper inventory and cash balances. Working capital management, as described by Block, Hurt, and Danielson, “… involves the financing and management of the current assets of the firm”. Additionally, trying to match sales curves to inventory is another important aspect of capital management because, as Block, Hurt, and Danielson further explain, “The goal is to squeeze out inefficiencies in the supply chain and thereby lower costs”. I am fearful that the constant drive to save money in production and delivery will force the almost ubiquitous adoption of machines and AI to begin running companies; the implications of this can be discussed at another time, but corporations finding new ways to control costs and working capital are accelerating the advent of a robotic future. As Barlow (2020) points out, “tax bias [inherent in corporations] actually encourages automation, even when there’s little efficiency gain from machines, to the detriment of employment. In fact, the researchers estimate that eliminating the bias toward capital could boost US employment by up to 6 percent”. Capital management is important but constantly finding new ways to eliminate costs shouldn’t always be seen as a good thing. Like the introduction video pointed out with debt, having none isn’t always a good thing and in a lot of ways is a sign of poor resource management; I would argue that having too much capital management could also be a negative.Moving on to John Deere and their quarterly results, their working capital is calculated below by taking their current assets and subtracting them from their current liabilities.WC JD 02-10.png Based on this result, John Deere has enough capital to cover their short term expenses and re-invest into the company. At the start of last year, John Deere had seen a decline in the demand for its products in the agricultural market and construction market. As a result, John Deere would need to monitor and adjust development and production of equipment and look for ways to reduce warranty costs due to downturns amongst its most valuable markets. John Deere’s short-term borrowing also makes up the majority of their liabilities and they will obviously need to be paid, but care should be taken to help minimize their size on the balance sheet. If interest rates are increased for example, short-term loans may not be as enticing and companies like John Deere would not be able to, or want, to borrow leading to a reduction of liquid assets and cost reductions that may negatively affect the company.
References
Barlow, R. (2020, November 6). We’re Paying for Robots to Take our Jobs. Seriously. Retrieved from https://www.bu.edu/articles/2020/we-are-paying-for-robots-to-take-our-jobs-seriously/ (Links to an external site.)
Block, S. B., Hurt, G.A., & Danielson, B.R. (2019). Foundations of financial management (17th ed.). Retrieved from https://www.vitalsource.com/ (Links to an external site.)
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