It is important to investigate the short-term and long-term liabilities of a company to identify any adjustment needed for the proper working capital management

It is important to investigate the short-term and long-term liabilities of a company to identify any adjustment needed for the proper working capital management profitability and growth. “Efficient management of working capital is a fundamental part of the overall corporate strategy in creating the shareholders’ value” (Nazir et al., 2009, p. 19). To have efficient management of working capital, an organization needs to identify the short-term and long-term liabilities for profitability and value. If firms adopt aggressive short-term liabilities, investors provide more value to the organization (Nazir et al., 2009, p. 27). This does not necessarily increase accounting performance, but just the stock market performance. Furthermore, it is stated that the networking capital is the current assets minus current liabilities (Block et al., 2019, p.178).

 

To create proper guidance for a company, one needs to understand the type of conditions we might encounter when a company is in a recession or a profitable state. When a company is in a recession, the short-term liabilities will rise, and inventory will fall. When a company is in a profitable state, the company inventory can rise and short-term debt can fall or be replaced with low-cost long-term liabilities (Block et al., 2019, p.178). With the understanding of the short-term and long-term liabilities, the organization can create a financial plan that can work with its current assets. The financial plan will require proper analysis of the organization’s general cost of borrowing, interest rates, and the volatility of short-term and long-term rates (Block et al., 2019, p. 181).

 

In this discussion, we will investigate the short-term and long-term liabilities of Deere & Company per their Q1 of 2020 financial statement. Short-Term Liabilities: Short-Term Borrowings ($10,008 mil) – Equipment operations ($947 mil) + Financial Services ($9,061 mil)Short-Term Securitization Borrowing ($4,416 mil) – Equipment operations ($42 mil) + Financial Services ($4,374 mil)Long-Term Liabilities: Payable to unconsolidated Affiliates ($147 mil)Accounts payable and accrued expenses ($8,630 mil)Deferred Income Taxes ($491 mil)Long-Term Borrowings ($30,475 mil)– Equipment operations ($5,567 mil) + Financial Services ($24,908 mil)Retirement Benefits and other liabilities ($5,710 mil)Total Liabilities: $59,877 mil for the quarter (February 2)         For Deere & Company, most of their debt is in their long-term liabilities per their 2020 Q1 report. Typically, the inventory must increase if there are ideally more long-term liabilities for the company to be profitable. However, there has been a decrease in inventory from 2019 to 2020 (approximately $754 mil). In addition, to calculate the working capital for the quarter of Deere & Company, one needs to subtract the total liabilities from the total assets of the company.Assets:Total Assets: $71,821 for the quarter (February 2)

The working capital of Deere & Company is calculated to be $11,944 mil. The company can now find out what type of short & long-term financing will be used, which is influenced by the interest rates.         One issue that I encountered when analyzing Deere & Company\’s 1st Quarter report of 2020 is that they have been decreasing their short-term borrowing while increasing long-term liabilities for each quarter. The concern I would have is their inventory numbers are averaging to approximately $6,620 mil from January 27, 2019, to February 2, 2020. The inventory is stagnant, and the company is increasing its long-term liabilities each quarter. When profit increases, short-term debt may fall and will also increase the inventory of an organization (Block et al., 2019, p. 178). My concern would be that the company is failing to be profitable in this current state. There needs to be further investment in short-term borrowing and inventory that can increase their revenue to adequate levels. Furthermore, increasing interest rates would impact this company. The general rule of interest rates is that short-term funds are compared to long-term funds. In the case of Deere & Company, the interest rate of the long-term liabilities has a high possibility of higher interest rates. It is stated that interest rate is extremely valuable to corporate executives in making a decision when borrowing between short and long-term (Block et al., 2019, p. 172). Interest rates also fluctuate over the years that need to be considered by an organization. With an increase in interest rate, an organization will be paying the additional cost to their liabilities. Considering a short-term liability for Deere & Company can assist with paying liabilities at a sooner rate. However, there needs to be a mixture of short-term and long-term liabilities that can assist the company in a successful plan, per the interest rates.

 

References:

Block, S. B., Hirt, G. A., & Danielson, B. R. (2019). Foundations of financial management (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 (Links to an external site.)

Nazir, M. S., & Afza, T. (2009). Impact of Aggressive Working Capital Management Policy on Firms\’ Profitability. IUP Journal of Applied Finance, 15(8). Retrieved from https://www.researchgate.net/profile/Talat_Afza/publication/228320063_Impact_of_Aggressive_Working_Capital_Management_Policy_on_Firms\’_Profitability/links/0912f50c06d20688c6000000.pdf