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Working capital

Supply Chains and Working Capital Management

> A. Why might a business not want to hold too much or too little working
> capital? Explain if the company with CVS has too much, too little, or just
> the right amount of working capital? How did you make this determination?
> B. What working capital financing strategy is used by CVS. What actual
> financial data support this conclusion?

Discussion 1A

Working capital is a tool for measuring a business’ short term assets and the short term
financing. It is, therefore, the net liquid assets of a business available to meet the liquidity
needs for its daily operations (Canadian Financial Executives Research Foundation,
2013).Cash conversion cycle and the Return on capital are some of the methods applied to
measure the effectiveness of the working capital. It’s also affected by various factors such as
size of the business, nature of the business, growth and expansion, business cycle, production
policy, and credit policies. This provides an indication of a business’ financial status and,
therefore, a determinant of a business’ financial capability. It provides insight into a business’
liquidity amount for conducting daily operations and building or expanding the business
(Canadian Financial Executives Research Foundation, 2013).
Therefore, every business or company should maintain a balanced amount of working
capital. Having a small amount of working capital implies that the business will have
difficulties in meeting its financial obligations that may translate to bankruptcy and reduced
credit ratings that consequently reduce its credit availability (Canadian Financial Executives
Research Foundation, 2013). On the other hand, excess working capital indicates that the
business’ financial status is reduced by excess back stock or a lack of reinvestment into the
business for growth and profitability improvement. Excess working capital denies the
company the opportunity to exploit its credit options and utilize its excess funds to invest in
profitable ventures. (Canadian Financial Executives Research Foundation, 2013)
The short term assets for CVS were $19727 million while the short term liabilities
were $13,000 for the year 2013. The working capital as a percentage of the total revenue
amounted to 9.88%. These figures present a favorable financial position for CVS. The CCC
for the year 2013 was 12.2 from the previous 13.6 for the year 2012. These figures generally
indicate the period that most of the cash is tied up in business operations and which makes the

funds unavailable for other business activities hence the lower the figures the better the
chances of positive growth.
CVS has just the right amount of capital. As explained above, working capital
provides a business with financial capability to meet its financial obligations and provide
finances for investment and growth. The positive growth trend in CVS including increased
value for dividends, increased market share value, and Payout ratio just to mention a few in
the year 2012 to present implies that the company is maintaining a balanced working capital
that does affect sales through back-stock of assets, but that its returns are from sales of its
assets ( Morning star, 2014).

Discussion 1B

Applying the balanced simulation approach for working capital management to the
financial records provided in the Morning Star, the strategy CVS applies is maintaining a
slightly high but constant amount of working capital throughout its financial year. This is a
combination of the lax and strict strategies of working capital management ( Morning star,
2014). From the key ratio reports, while the current assets remain constant, the liabilities vary
over time. This accounts for the increase in working capital in months where the liabilities
fall. Therefore, the company is able to meet its financial obligations including expansionary
plans throughout the year as the working capital balances itself out ( Morning star, 2014).

Discussion 1C

Cash Conversion Cycle (CCC) is used to measure the amount of time needed to
transform the amount of money invested in a company’s operations to cash receipts from
these operations (Dybek, 2014) This value is arrived at by summing up the average period for
processing inventory with the average period for receivables collection then deducting the
average period of payables payment (Dybek, 2014). The CCC for the year 2013 was 12.2
from the previous 13.6 for the year 2012. These figures generally indicate the period that most
of the cash is tied up in business operations and which makes the funds unavailable for other
business activities hence the lower the figures the better the chances of positive growth. In the
year 2013, CVS’ cash conversion cycle deteriorated from quarter 2 all through to quarter 4.

Discussion 2B

There are several approaches that CVS can employ to reduce its Cash Conversion
Cycle, for example, reduction in its sales cycles. CVS has well established itself in the market.
However, it is still facing stiff competition from companies like Walgreen Rite Aid and Wal-
Mart. (Coffey, Fraser, Lee, Kelsay, & Redgrave, 2005). Therefore engaging in more direct
sales with its customers, for example, by employing sales representatives and engaging in
more advertisements compared to its competitors. This will reduce the CCC and even lock out
competitors. CVS has been accused of preparing vague financial reports, therefore, to address
this, as a strategy it should ensure that it prepares financial statements that are as transparent
as possible to improve its credibility and attract investors and financers (Coffey, Fraser, Lee,
Kelsay, & Redgrave, 2005)
In addition, the company can also improve its operations by changing its operation and
business model. This is in terms of time taken to send invoices and means of conducting
business. For example, it can open up its own trucking line and distribution centers to reduce
its time and costs of transactions process hence be able to compete on a similar ground with
Wal-Mart that has similar operations. This will give CVS an opportunity to lock out its

competitor as it enjoys a larger number of countrywide store distributions. Finally, since CVS
engages itself in production of their medicine, they can employ a manufacturing process that
is leaner and increase efficiency, for example, by having just-in time inventory and
maintaining a small amount of extra inventory as it is not realistic for any company not to
have inventory. (Coffey, Fraser, Lee, Kelsay, & Redgrave, 2005).
Discussion 2B

TCF is a new conservative company that is aiming to expand. Its budget between Julys
to December 2013 reflects a struggling company that is not ready to expand. This is evident
by the fact that the company does not have enough cash to cater for its financial obligations
and still promote expansion. Form the data, it is evident that the cash surplus is just enough to
cater for TFCs monthly financial obligations and in some cases, it operates on a deficit. This
implies in case of unexpected expenses or events, TFC would have to seek external financial
resources to cater for such costs.
In addition, TFCs cash flow budget provides it with low credit ratings as it illustrates
that the company may be unable to furnish loans acquired and this plunges it into further
problems as is may lack credit to cater for its expansionary targets. However, to deal with
these TFC can undertake various approaches to optimize its budget that will increase its
profitability, working capital, and credit ratings that will impact positively on its expansion
First, through creation of daily budgets to eliminate the one month deferral period of
payment as this may negatively impacting their cash flow every month and may have an even
worse effect when these individuals defer and fail to pay. Second, they can reduce the
dividend payment as this is forming one of the major withdrawals from TFCs cash account.
This reduction will free up some cash and place TFC in a better cash position. TFC should
also shift from using income statement and start preparing cash budgets on a monthly basis to
give them a clear picture of their cash flow. This will enable the company to know where to
make adjustments on their cash budget. Finally, TFC should improve its debt collection so as
to reduce the bad debts and increase its ending cash.



Morning star. (2014, Feb 21). Morning Star Inc. Retrieved February 2014, 2014, from
Morning Star
Canadian Financial Executives Research Foundation. (2013). Working Capital Optimization.
Toronto, ON: Canadian Financial Executives Research Foundation.
Coffey, C., Fraser, K., Lee, H., Kelsay, W., & Redgrave, C. (2005, April 1). CVS Valuation.
CVS: Expect Something Extra, pp. 3-64.
Dybek, M. P. (2014, February 26). Stock Analysis on Net. Retrieved February 26, 2014,

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