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.
Asked to explain his company's success at driving down working-capital levels, Qualcomm CFO William Keitel demurs, saying, "You can always do better." He's not being humble so much as capturing the dominant theme for working capital over the past several years. In 2005, for the fourth consecutive year, the 1,000 largest publicly traded companies in the United States managed to reduce the amount of money they had tied up in working capital as a percentage of sales. The company has achieved reductions by improving customer communication, others by adjusting their collections processes, and yet others by tying incentive compensation more closely to a successful reduction in working capital.
Companies can learn from this example, to motivate and incent stakeholders (employees, customers, share-holders, management, and investors) to help alleviate working capital management problems.
CITE THIS AS:
YouSigma. (2008). “Qualcomm’s Working Capital Management." From http://www.yousigma.com.