Working Capital Case Study

Working Capital Case Study

When it comes to retailers the first name that comes to mind is Wal-Mart. However, running in close second would be Target. Some argue Wal-Mart’s effectiveness is due in great part to the way it handles its operating system and working capital. This report analyzes the issues surrounding Target’s operating system and working capital and explores varying methods to improve the organization as a whole. The analysis will make recommendations for financial decisions the organization could pursue based on its working capital situation, make recommendations for ways the organization can improve its operating cycle, and describe the possible financial impact of these recommendations on the organization’s overall working capital situation.

Before one can begin to offer recommendations, the financial groundwork on which the recommendations are built must be identified. According to their most recent annual report (2005) Target reported the following (in millions) in 2004 and in 2003 respectively:

Sales $45,682 40,928

Cost of Goods $31,445 28,389

Inventory $5,384 4,531

Accounts Receivables $5,069 4,621

Accounts Payable $1,633 1,288

Current Assets $13,922

Current Liabilities $8,220

By way of this information we are able to deduce Target’s inventory period as 57.57 days, the accounts receivable period as 38.71 days and the operating cycle as 96.28 days. Additionally, the payables period is identified as 62.29 days and the cash conversion cycle at 33.99 days. Finally, the annual report also reflects Target has a net working capital of $5,702,000.

In identifying this information we can now make recommendations for the organization based on its working capital situation. In the event Target has cash available there are two distinct options to pursue including first the identification of short term expense. Any monies earned above the expense...