Explain the concept of working capital and its importance to Genesis Energy

Explain the concept of working capital and its importance to Genesis Energy.

Working capital refers to current assets used in everyday operations (Brigham & Ehrhardt, 2010). It is the difference between current assets, which include cash, accounts receivable, inventories and other marketable securities, and current liabilities, i.e. accrued expenses and taxes, accounts payable, short term notes payable, and current maturities of long term debt. It measures the liquid assets of a company. Working capital is important to Genesis energy because without adequate working capital the company would not be in a position to explore its growth potential, or take advantage or expansion opportunities.

Describe the mechanism and methodology used to ensure that operational needs are met through short-term financing. Explain why this methodology is important to Genesis Energy

Several methods can be utilized to ensure that operational needs are met through short-term financing. One approach involves matching the maturities of assets and liabilities, so that temporary current operating assets are financed with short-term debt (Brigham & Ehrhardt, 2010). Other methods include:

Maximizing working capital will ensure that Genesis Energy carries adequate liquidity to meet its operation needs so that in the event that extra operation funding is required, it can be met through short term financing without committing to long term debt. Long term debts are generally more expensive due to flotation costs. Short-term credit agreements are also less restrictive.

• ACH or Wire – Encouraging customers the make payments by ACH or wire so that funds available immediately.
• The utilization of Lockbox system – This ensures that payment from customers don’t remain in transit for a long period of time.
• Inventory Control – Carrying the lowest possible level of inventory so that cash is not tied down. Just in Time (JIT) or reducing the goods-in-process inventory can be helpful.
• Receivables management – Making sure an effective receivable control system is in place
• Accounts Payable/Trade Credit management – This is the largest single operating current liability, representing about 40% of the current liabilities for an average non-financial corporation (Brigham & Ehrhardt, 2010). Therefore, it is important to manage this effectively to maximize working capital.

Explain how working capital represents the assets that are needed to carry out the day-to-day operation and how working capital can act as a source of financing or increase the need for financing.

Working capital is what is left after all current liabilities have been settled. It is required to meet day to day operation like meeting payroll obligations and maintaining general operation. Without adequate working capital a business will not be able to keep its doors open. Unlike some short term loans, internally generated funds do not carry interest, penalty or special stipulations. Working capital can act as a source of financing because in our example, a business like Genesis Energy would not need to seek outside finance for its expansion plan if it has adequate working capital. On the other hand, it can increase the need for financing because a business cannot continue operations with adequate working capital.

Future Value: $133.10

• What’s the future value of an initial $100 after 3 years if it is invested in an account paying 10% annual interest?

Present Value: $75.13

• What’s the present value of $100 to be received in 3 years if the appropriate interest rate is 10%?

Reference

Brigham, E. F., & Ehrhardt, M. C. (2010). Financial Management: Theory and Practice, 13e, 13th Edition.

[VitalSource Bookshelf version]. Retrieved from http://digitalbookshelf.argosy.edu/books/1111894922/id/pg642