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Google’s Working Capital Management

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Long-term financial decisions such as capital budgeting and the choice of capital structure are called long-termfor two reasons. First, they usually involve long-lived assets or liabilities. Second, they are not easily reversed and thus may commit the firm to a particular course of action for several years. Short-term financial decisions generally involve short-lived assets and liabilities, and usually they are easily reversed. Compare, for example, a 60-day bank loan for $50 million with a $50 million issue of 20-year bonds. The bank loan is clearly a short-term decision. The firm can repay it 2 months later and be right back where it started. A firm might conceivably issue a 20-year bond in January and retire it in March, but it would be extremely inconvenient and expensive to do so. In practice, such a bond issue is a long-term decision, not only because of the bond’s 20-year maturity, but because the decision to issue it cannot be reversed on short notice.

At the end of 2005 Google was sitting on a cash mountain of near $4 billion compared to $450 million at the end of 2004. The $4 billion is almost certainly far more than Google needs to meet any seasonal fluctuations in its capital requirements. Such firms with a surplus of long-term financing never have to worry about borrowing to pay next month’s bills or making investments and are consider potential candidates for acquisition. What caused this increase? Did the extra cash come from Google’s additional long-term borrowing? From reinvested earnings? From cash released by reducing inventory? Or perhaps it came from extra credit extended by Google’s suppliers. The correct answer? All of the above.

Companies can learn from this example, to effectively hone their financing, investing and collection strategies to fulfill their long- and short-term financial needs and effectively manage their cash balance.

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YouSigma. (2008). “Google’s Working Capital Management." From http://www.yousigma.com.

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