Working Capital and Financial Environment Paper

Working Capital and Financial Environment Paper

Rapid technological change, conglomeration, mergers, and globalization are rocking the financial industry here and abroad. In this paper we will describe and quantify the elements of working capital for the most recent year explain the functions of intermediaries and financial regulatory bodies with Citibank and JPMorgan Chase. This paper will also discuss the impact of the 2002 Sarbanes-Oxley Act on the financial systems in the United States. As financial institutions delve into a wider range of products and activities, policymakers almost certainly will have to decide whether they want to establish a single regulator to oversee all types of financial activity or whether they will be content with the segmented regulatory system long in place in the United States. The central challenge that financial regulators, especially those supervising banking activities, will face is how to deal with the rapid and increasingly complex changes in the financial arena.

Working capital is the information most people are searching for when reading a balance sheet. The calculation (current assets - current liabilities = working capital) tells what would be left over if a company used all of its short term resources, to pay off its short term liabilities. When a company is heavy with working capital, it generally will avoid financial strain.

A company that deals with cash on a daily basis, like Citibank and JPMorgan Chase, needs very little working capital. Because they incur cash each day, both can raise funds quickly enough to stave off a financial crisis. In contrast, a company that builds tractors can not count on selling enough of its products to protect themselves from short term financial crisis. A manufacture of tractors would be selling most of their items on long term payment so they must keep sufficient working capital on hand.

Citibank's working capital for the fiscal year 2005 was 31,092,690 and JPMorgan Chase's working capital was 319,735 respectively. Both institutions are positioned well with working capital. "The goal of Working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses". (Wikipedia)

"One measure of cash flow is provided by the cash conversion cycle - the net number of days from the outlay of cash for raw material to receiving payment from the customer". (Wikipedia) Management of working capital includes Cash management, Inventory management, Debtors management, and Short term financing. Cash management allows a business to meet day to day costs. Inventory management (such as JIT or Just in Time) allows a company to reduce cost of warehousing products. Our compared banks have little need to heed inventory management; they deal primarily with numbers translated and stored by electronic data. Debtor management uses varying credit terms to attract customers, both banks use credit reports to make these determinations. Short term financing identifies which source of payment will be the most beneficial or lucrative to each bank.

In the large framework of financial securities regulation, there are various government administrative agencies which are responsible for the securities legislation within their respective jurisdictions. There are also self-regulatory organizations such as the Investment Dealers Association and the U.S. stock exchanges, which have the power to discipline members and securities issuers.

The primary goal of the Securities Act, which is regulatory in nature, is the protection of the investor but other goals include capital market efficiency and ensuring public confidence in the system. They try to be aware of potential signs of market manipulation such as market dominance, price leadership, high closing etc. Securities regulators investigate complaints against persons, business entities, corporations, and broker-dealers alleged to have violated licensing, registration, or antifraud provisions of Securities Laws which fall within their jurisdiction and to the extent permitted by law.

The mandate of the Enforcement Division of Securities Commissions is to protect the investing public through the investigation of complaints and the enforcement of the Securities Act through administrative proceedings. The decisions of a hearing panel can see a respondent suspended or even barred from the industry. Substantial fines can also be levied.

As a result of the Foreign Corrupt Practices Act of 1977, Congress began to require all publicly traded companies to keep records which represent the firm's transactions accurately and fairly. In addition, they must maintain adequate systems of internal accounting control. Following the rash of reported financial statement frauds in 2001 and 2002, Congress passed the Sarbanes-Oxley Act (known as the corporate responsibility act)