Working Capital Policy
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Running Head: WORKING CAPITAL POLICY
Working Capital Policy
Mariano Santana
University of Phoenix
Table of Contents
Working Capital Policy
Danaher, Inc. is an industrial company that “designs, manufacturers and markets innovative products, services and technologies with strong brand names and significant market positions” (Danaher, 2007). The companys 2006 Form 10-K provides insightful information regarding the overall financial perspective and performance for the year. The main interest retrieved from the data was the working-capital management efforts, especially in the section of cash operations. This paper will assess and create a working capital policy for Danaher that addresses its cash management needs for the long term. It will also describe the weaknesses in its existing working capital.
Danahers Working Capital
Danaher manages both domestic and international operations within its multiple business segments. The following excerpt gives a vague description of the companys working capital: “Our businesses maintain sufficient levels of working capital to support customer requirements. Our sales and payment terms are generally similar to those of our competitors” (Danaher, 2007, p. 10). Although it does not go into any detail, the remainder of the 10-K paints a compelling picture of how well the company performed in its last fiscal year. Nonetheless, like the CFO of Qualcomm, William Keitel once said about his companys success with working capital, “You can always do better” (Meyers, 2006, para. 1). The following elements help to assess and create a working capital policy for Danaher and address its cash management needs for the long term.
Cash Balance Requirements
On the last day of 2006, Danaher had $318 million of cash and cash equivalents which were made easily accessible when needed for working capital and other capital expenditures (Danaher, 2007). The cash requirements for the companys day-to-day operations are plentiful and not mistreated in any way. Investments are made into highly liquid debt instruments with maturity of 90 days or less in U.S. and international banks. This is wise because it allows the company to access cash as needed in a short amount of time. At the same time, international investing accrues interest while excluding it from U.S. federal taxes (Danaher, 2007). “It is generally a good idea for firms to figure out first how much cash to hold to satisfy the transactions needs” (Ross et al, 2004, p. 754).
Credit Policy
Danahers exact credit policy is unavailable for review in its 10-K, however, what is stated is “Although the Company does not obtain collateral or other security to support these financial instruments, it does periodically evaluate the credit standing of the counter party financial institutions” (Danaher, 2007, p. 29). That is a fair statement, but the company truly must consider the relationship and the trustworthiness it has had with its partners. Rightfully so, payment terms beneficial to both parties would need to be established such as the 2/10, net 30 rule. Defining those terms would be determined by the companys entire accounting department “However, the simplest way to assess a customers credit standing is to seek the views of a specialist in credit assessment” (Allen et al, 2005, p. 816).
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