Working Capital

If Target is fortunate, enough to increase its revenue by 20%, then it is likely that the cost of goods sold will also increase. However, the percentage increase in cost of goods sold does not have to be equal to 20%. Target can employ some cost control measures, to assist in keeping the cost of goods sold down. Some of the cost control measures that Target can utilize include buying in bulk, and reducing the total of carriage inwards (cost of transporting goods for sale to the business premises). Making bulk purchases will allow Target to enjoy huge purchase discounts from its suppliers. Therefore, the total purchase price of supplies will be reduced by the percentage of the discount allowed. By utilizing cost-effective methods of transportation, Target can be able to reduce its costs of transporting goods to its business premises. For instance, instead of using the road to transport bulk goods, Target can have the goods transported by rail, since it is cheaper than road.

            If Target achieves the 20% increase in revenue, the subsequent effect on its net income will be positive. However, an increase of 20% in revenue does not necessarily mean that Target’s net income will increase by 20%. This is because, for revenue to increase, the cost of operating activities used in generation of revenue also increases. Therefore, some part of the extra revenue is used to offset the extra expenses incurred; hence, the percentage increase in net income cannot be equal to percentage increase in revenue. Nevertheless, increase in revenue results into increase in net income (Understanding Net Income, 2007).

            The impact of increased income on the business’s cash flow statement is a positive one. When a business is able to control its costs, it is able to earn more income from the increased revenues. Subsequently, increase in income results into increase in cash flow. Target can utilize the additional cash in different ways. For example, the company can utilize the additional cash to expand its operations, maybe by opening additional retail stores, or introducing new brands to the market. Target can also utilize the additional cash to intensify its marketing activities. For instance, it can increase its advertisement campaigns by advertising more on the internet, in print media, and on televisions. All these activities are likely to result into more increases in revenue since; they are all directed towards attracting more customers, and expanding the existing market share.

            Target’s statement of financial position for the year ended 30 January 2011 indicates that, the total amount of long-term debt is more that the total amount of equity capital (Financial Results TGT, 2011). Based on this, Target can utilize the additional cash from increased revenue to settle some of its debts. If this happens, then Target will be able to reduce its debt to equity ratio. Currently, Target’s debt to equity ratio stands at 5.1 (Financial Results TGT, 2011). Although a high debt to equity ratio indicates that, a company is aggressive in financing its growth using outside capital, it can result in unstable earnings due to additional interest expenditure. Furthermore, a company risks bankruptcy in case it is unable to finance its debt(s). Therefore, it would advisable for Target to use the extra income to settle some of its debt. This way, it will be able to reduce its debt to equity ratio to a manageable level: equal or almost equal to the industry’s required level.

Target’s competitors include Wal-Mart, and Costco Wholesale, among others. Based on their 2010 statements of financial position, Wal-Mart debt to equity ratio stood at 0.33, while Costco debt to equity ratio stood at 0.17. These indicate that Target utilizes more of outside capital sources to finance its assets as compared to its competitors. The decision to utilize the extra cash from increased revenue would help Target bring its debt to equity ratio to the industry’s accepted level and hence, achieve the same range of debt to equity ratio as its competitors.

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