Google Inc., and Microsoft Corporation are both world leaders in the technological fields. Google deals in social media, search engine services, web hosting, cloud storage, advertising, smartphones, apps and other internet and technology related products and services. Microsoft, on the other hand, is known mostly for its Office and windows software used in almost every other computer. The company also deals in software and app development, smartphone production and other computer packages. Both companies have working capital structures that indicate healthy financial statuses on both ends. However, Google’s working capital as of 2016 is much higher than that of Microsoft with over 20 billion dollars. Google is on the highs of $88 billion while Microsoft’s working capital stands at $68 billion. This is relatively a small but nonetheless significant difference that tells a lot about the structures put in place by each company’s management (Sagner, 2013).
One of the reasons this difference appears is due to the working capital structure differences. Google has less debt compared to Microsoft. This, however, does not necessarily mean that the former is doing better than the latter. It means that Google stores a lot of its cash flow as current assets rather than reinvesting it. The company also has fewer debts because it does not need extra cash to reinvest in assets other than those within the company. Microsoft, on the other hand, has a much higher debt which is at $40 billion. They also spend close to 10% of their assets in long term investments and other short term investments. This, therefore, reduces their working capital as they end up having fewer assets and more liabilities (Hulten, 2010).
The difference in working capital structures can also be explained by annual growth rates for each company. Google has maintained a steady and sustainable annual growth rate of 12% each year since 2011. Microsoft, on the other hand, experiences a less predictable annual growth rate which may range from 7% to 11%. The growth rate affects other factors such as internal expenditure and financial planning. For Google, they can easily plan for their expenditure beforehand because they are aware of what to expect. On the contrary, Microsoft is limited because their rates are unsteady. They have to work according to each year’s rates and not according to preplanned expenditure. When growth rates increase, there is need to increase factors such as human resource, equipment and technological systems. These can be costly, thus, reducing assets and increasing liabilities. As a result, this leads to a lower working capital as seen in the case of Microsoft (Vijayakumar, 2001).
Pricing is also another aspect that affects working capital structure. It is quite obvious that Microsoft enjoys monopoly in its field. It is the largest and most dominant company that deals in office software. In addition, their products and services are not as diverse and Google’s. Microsoft is quite limited in terms of products offered. They mostly focus on MS Office and Windows OS. Also, windows phones are not as popularized as Android phones. Therefore, their pricing strategies differ from Google’s. Google has a very effective system of pricing whereby their products and services are sold according to market trends. The kind of services and products they offers, for instance smart phones are very competitive. New phones with superior features are released into the market every now and then and it is therefore impossible to maintain constant prices on products. Google has to take advantage of these market trends and make the most out of a product for as long as they can. Microsoft on the other hand maintains a relatively constant pricing strategy whereby prices do not shift that much. This is because on the nature of the products they sell. For instance, Microsoft Office and Windows Operating systems for computers have changed very few times since 2003. They normally upgrade their windows after every few years. This rigidity in pricing makes their cash flow almost constant while in the case of Google, Cash Flow can be uncontrollable. The ability to make outrageous sales after the release of a product makes it easier for Google to make more money than Microsoft thus affecting the difference in working capital (Hulten, 2010).
Though both companies are doing quite well financially, in comparison to most other companies in the world, they can still work on a few things to better their performance. Google for instance needs to invest more in tangible assets rather than keeping their money as leftover cash. There are a lot of investment opportunities for such a company. Furthermore investing would be beneficial to other smaller companies that Google might invest in. Microsoft on the other hand can improve their working capital by having a better pricing structure, reducing their debt and diversifying their products and services. These are the only factors that seem to be lagging its performance hence the need to work on them (Sagner, 2013).
Google would be a better choice for making an investment due to its evidential stability. The company experiences stable growth each year and therefore offers higher chances of making profits compared to Microsoft which has unstable trends. It is better to invest with a company whose future, one can easily predict. As for loaning, Microsoft would qualify for a substantial amount of loan in order to pay its debts which are over $40 billion. This is a huge amount of debt which could be settled with a debt. The company is also stable enough to ascertain the ability to pay back a loan once the debt is settled.
- Hulten, C. R. (2010). Decoding Microsoft: Intangible capital as a source of company growth. Cambridge, Mass: National Bureau of Economic Research.
- Vijayakumar, A. (2001). Working capital management: A comparative study. New Delhi: Northern Book Centre.
- Sagner, J. (2013). Essentials of working capital management. Hoboken, N.J: Wiley.
