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Coca-Cola’s (Coke’s) Working Capital Management

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Corporate finance can be mainly categorized into three domains: capital budget, capital structure and working capital management. The raising and management of long-term capital belong to the domains of capital budget and capital structure. Source and use of long-term capital are traditionally aspects of much concern in finance, while management of the working capital that sustains the operation of an enterprise draws relatively little attention. Working capital, including current assets and current liabilities, is the source and use of short-term capital. In addition to company characteristics, working capital is also related to the financial environment, especially the fluctuation of business indicators.

Thus enterprises have had to manage their working capital more prudently to adapt to the changing financial environment. Kargar and Blumenthal (1994) demonstrated that many enterprises go bankrupt despite healthy operations and profits owing to mismanagement of working capital, so it is a topic that deserves increased investigation.

The goal of all companies is to create value for the shareholder. But how is value measured? Wouldn't it be nice if there were a simple formula to figure out whether a company is creating wealth?

Coca-Cola Enterprise used Economic Value Added (EVA) in the 80’s in order to hold its profit and loss statement to a higher standard and attract investors. Another way to evaluate true profit is to calculate the cost of capital which is what EVA attempts to do.  By managing working capital and the cost of such, a company can stay competitive and liquid.  There are two kinds of capital – that which is borrowed and that which is invested.  There is a cost to both kinds of capital.  By using EVA Coca-Cola Enterprise was able to attract investors which meant a steady stream of working capital with which to run the day to day business.

Companies can learn from this example, to use performance metric such as EVA, to help calculate the creation of shareholder value. EVA distinguishes itself from traditional financial performance metrics such as net profit and EPS: EVA is the calculation of what profits remain after the costs of a company's capital - both debt and equity - are deducted from operating profit. The idea is simple but rigorous: true profit should account for the cost of capital.

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YouSigma. (2008). “Coca-Cola’s (Coke’s) Working Capital Management." From http://www.yousigma.com.

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