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In the highly competitive contemporary business outlook, it is very essential for the corporations to sustain and grow in terms of their financial health. Inside as well as outside stakeholders keenly follow all the relevant aspects of the financial situation of the company to decide their further association with the firm. While doing so, a number of financial metrics are taken into consideration. An important one of them, to gauge the ability to pay off debts in short term, is the working capital.
The intermediaries and the Financial Regulatory Bodies in collaboration with which the firms work are also of key importance to analyze their strength and the capacity to grow.
Last but not the least; the Sarbanes Oxley Act is yet another important milestone in terms of raising the standards of accurate financial reporting. Working Capital Net working capital encompasses current assets (accounts receivable, inventory, and cash), and current liabilities (accounts payable, salaries, and money owed).
Net working capital is the difference between current assets and current liabilities (Ross & Modigliani, 2007).
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Net working capital indicates a potential for growth, or an indication of the company’s unhealthy financial situation (Investopedia, 2009). Management has control over net working capital through adjustments in inventory, accounts payable, accounts receivable, and cash. The metric from net working capital offers insight into the company’s operating efficiency, and indicates if the company can pay short-term bills with near liquid assets.
Alcoa’s assets are $8,150,000 and liabilities are $7,279,000 indicating a working capital of $871,000. Nucor’s assets are $6,397,000 and liabilities are $1,854,192 indicating a working capital of $4,543,294. Both have positive net working capital allowing pay-off of short-term liabilities.
Nucor has a potential for growth, but Alcoa is too slim for growth. Alcoa’s working capital is maintained from minor adjustments in the year. For example, short-term debt increased with the purchase of raw materials, but accounts receivables and receivables decreased maintaining working capital.
Nucor’s working capital is increased by one million dollars from adjustments during the year. For example, cash and inventories increased while receivables decreased ending at an increase of assets. Short-term debt increased and accrued liability doubled, but with a decrease in accounts payable ($400,000), liabilities ended up increasing. Working capital offers investors a glimpse into a company’s financial health. Although net working capital is one tool for an analysis, other ratios will offer understanding of the company’s health.
Can the company operate and pay bills, or is the business headed for bankruptcy? Such questions, among others, are answered from a simple calculation called net working capital. Intermediaries and Financial Regulatory Bodies In a general sense, an intermediary is an individual or firm that acts in the best interest of two or more different parties. Both Nucor and Alcoa take advantage of using intermediaries in their businesses. For example, Nucor used Mark Spitzer, the Arizona Corporation Commission Chairman as an intermediary between themselves and Arizona Utilities.
Spitzer’s job as the intermediary was to try to help find a way for Nucor to purchase electricity at a price that would allow the company to reopen their Kingman, Arizona facility. (Recycling Today, 2009). Alcoa also takes advantage of using intermediaries in their business. Alcoa uses a third-party intermediary concerning their accounts payable arrangements. The third party intermediary advances the amount of the scheduled payment to the vendor that is owed less an appropriate discount, which is paid before the scheduled payment date.
Alcoa then pays the third-party intermediary on the date that is negotiated with its vendors. “The amounts outstanding under these arrangements were paid through third party intermediaries and were classified as short-term borrowings in the Consolidated Balance Sheet and as cash provided from financing activities in the Statement of Consolidated Cash Flows. (Alcoa, 2007). Financial regulatory bodies are independent agencies or organizations that regulate the financial activities of a company within an industry. In the United States, the U. S. government typically establishes the bodies.
But, many regulatory bodies exist around the world as well. A superb example was noted in 2008 when Nucor signed a joint venture agreement with Switzerland’s Duferco Group to produce steel beams in Italy. These beams were to be distributed in Europe and North Africa. Once the regulatory bodies approved of the joint venture, these beams eventually were produced and distributed. Regulatory bodies were also seen active within Alcoa in June 2006. Alcoa had intentions to begin smelter in Southwestern Trinidad. The company had to wait on Alcoa’s board and regulatory bodies.
The regulatory bodies did approve the new plant and Alcoa began to produce 341,000 metric tons of aluminum smelter annually. The Sarbanes-Oxley Act The Sarbanes-Oxley Act is legislation that passed in 2002 to place responsibility on corporations in regards to accurate financial data. Personal responsibility by managers is the new corporate standard. The CEO and CFO of all companies must sign records saying that financial data is accurate (Albrecht, 1994). The new Act requires companies to have internal audit systems and allows the SEC oversight of all accounting.
Alcoa reports having “a strong internal governance” to carry out the audits, procedures and controls required by the law (Alcoa Inc. , 2002). To increase transparency of records, companies do not allow one single person to be responsible for financial data. One person may be responsible for collecting data and another person is responsible for recording the data. The Sarbanes-Oxley Act has significantly raised expectations and standards in corporate accounting. Conclusion To sum up, the working capital which is the indicator of the operational efficiency of the firm is more pleasant for Nucor as compared to Alcoa.
Thus, it has higher potential for growth. Both the firms employ various intermediaries and financial bodies to seek support, cooperation and a way to expand the business further. Moreover, Sarbanes Oxley Act has proved to a landmark in terms of securing the interest of shareholders through marginalizing the chances of deliberate false financial reporting. This has particularly enhanced the confidence of stakeholders in the financial reporting. At the same time, it has increased the pressure on the firms to adopt sound financial policies to maintain shareholder trust and build good reputation in the market.
References Albrecht, Stice,,Stice Swain . (1994). Accounting: Concepts and Applications (10th ed. ). : Cengage Learning. P. 191 Aloca. (2007). Annual Report. Focused on Sustainable Growth. Retrieved June 8, 2009 from the World Wide Web: http://74. 6. 146. 127/search/cache? ei=UTF-8&p=alcoa+2007+annual+report&fr=slv8-yie7&u=www. alcoa. com/global/en/investment/pdfs/2007_Alcoa_Annual_Report. pdf&w=alcoa+2007+annual+report+reporting+reports&d=c47fmBlMSz3J&icp=1&. intl=us Alcoa Inc. , (2002) Alcoa Press release: Alcoa CEO and CFO Certify Company's Financial Statements.
Retrieved June 8, 2009 from http://www. csrwire. com/press/press_release/26537-Alcoa-CEO-and-CFO-Certify-Company-s- Financial-Statements Investopedia. (2009). Working capital. Retrieved June 7, 2009, from http://www. investopedia. com/terms/w/workingcapital. asp Recycling Today. (2009). Nucor to Keep Plant Closed. Retrieved June 8, 2009 from the World WideWeb:http://www. recyclingtoday. com/news/news. asp? ID=5606;SubCatID=73;CatID=23 Ross, Stephen ; Modigliani, Franco. (2007). Fundamentals of Corporate Finance, 5th edition. New York, NY McGraw-Hill Companies
Ensuring Financial Sustainability in Today's Competitive Business Landscape. (2020, Jun 02). Retrieved from https://studymoose.com/working-capital-new-essay
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