C. Moore Module Five Activity- Working Capital Mgmt PDF

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Carissa Moore FIN-320 Principles of Finance 5-1 Activity: Working Capital Management April 2, 2021 Working capital management is an integral financial function that is vital to a business’s sustained success. This organizational strategy is designed and executed to a degree that helps businesses meet its short-term commitments. When companies are considering new business endeavors or opportunities, it is vital that a firm calculate and analyze their working capital in order to identify any potential financial obstacles and assess overall financial health. Effective working capital management allows companies to manage through any early issues that may arise and allow for proper planning. In this analysis, we will look closer at working capital management with our example company, The Walt Disney Co (Disney) and discuss how working capital management dictates business operations. When discussing business operations and determining how to make a company sustainable, financial documents are key elements used to help steer company stakeholders. When specifically addressing working capital management, corporate financial professionals will have to review the company balance sheet in order to calculate a firm’s working capital. “The working capital formula tells us the short-term liquid assets remaining after short-term liabilities have been paid off” [ CITATION CFI21 \l 1033 ]. This formula is essential for a variety of objectives such as performing financial analysis, forecasting and managing a firm’s cash flow. The working capital formula will be able to measure an organization’s ability to pay operating costs and short-term liabilities.

As previously stated, a firm’s balance sheet is used to calculate and analyze working capital. First, the company’s current assets need to be totaled. This includes cash/cash equivalents, accounts receivable and inventories. Second, the company’s current liabilities then need to be tallied. Current liabilities include accounts payable, short-term debt and other accrued liabilities. Once both totals have been identified, you simply deduct the total liabilities from the total assets. From there, corporations will have their working capital [CITATION Joh18 \l 1033 ]. Through the efficient use of resources, businesses’ can better their earning potential and profitability with effective working capital management techniques. For example, if Disney had a product that cost the company $250 per unit to make but sold the product at a rate of $500 per unit, Disney’s working capital would increase by $250 with each of that product sold. As we have already conveyed, working capital management is a critical function to a company’s short-term success that ultimately bolsters long-term sustainability. This process plays an important role within a business. The working capital formula is used to evaluate the firm’s financial health. Effective working capital management will help a company maintain proper cash flows in order to meet its interim obligations. Working capital management will help manage the net operating cycle and closely monitor inventory management. Not only does this function play an integral role in assessing short-term financial health, it also helps the company minimize expenses on working capital. Ultimately allowing the company to maximize its return on any investments [ CITATION Ali211 \l 1033 ]. Now we will take a look at Disney’s working capital and discuss the company’s current financial state. By examining Disney’s balance sheet pulled from Mergent Online, we can see the most recent fiscal quarter reports are for 1st quarter, 2021. In the quarter, the total current assets reported was $34,874,000 and the total current liabilities was $26,546,000. After deducting the

total liabilities from the current assets, Disney’s working capital equates to $8,328,000. This simple formula shows us that Disney does have enough working capital in order to meet its short-term commitments. The company will be able to pay their suppliers, vendors and operating costs across their various sectors of business. When looking towards future projections, it is possible that Disney will see an inflow of cash by the end of the calendar year, which we will discuss next. Looking towards the future direction of the Walt Disney Company, the firm seems to have a decent financial outlook compared to the last calendar year. If we look at the 1st quarter, 2020, we can see the company was operating at a loss at the time. The current assets totaled to $27,776,000 and the total liabilities totaled to $34,797,000 with a working capital loss of $7,021,000. Although the COVID-19 pandemic created even more revenue loss for the company in 2020, Disney found other methods for generating cash during theme park shutdowns and restrictions. Disney’s streaming service Disney+ launched in November 2019. What was meant to be the future success product for Disney, became its “saving grace” through 2020. When Disney+ celebrated its first year of service in November 2020, the platform bolstered more than 60 million subscribers. A goal Disney was aiming for in a two to three-year period [ CITATION Fra20 \l 1033 ]. Because of this great success, Disney has been able to rethink their streaming strategy and expedite production projects to keep new, original content coming faster to consumers. In addition to Disney+, the company may also see increased revenues in their theme parks division in 2021. This primarily stems from the distribution of COVID-19 vaccines and increased confidence by consumers for traveling and theme parks.

References CFI. (2021, April 4). Working Capital Formula . Retrieved from Corporate Finance Institute : https://corporatefinanceinstitute.com/resources/knowledge/modeling/working-capitalformula/ Pallotta, F. (2020, November 12). Disney+ was the future. Now it's Disney's present. Retrieved from CNN: https://www.cnn.com/2020/11/12/media/disney-anniversary/index.html Sheridan Titman, A. J. (2018). Financial Management: Principles and Applications. Boston: Pearson Education. Tuovila, A. (2021, March 1). Working Capital Management. Retrieved from Investopedia: https://www.investopedia.com/terms/w/workingcapitalmanagement.asp#:~:text=Working %20capital%20management%20is%20a,liabilities%20to%20the%20best%20effect....