Starbucks Working Capital Strategies Starbucks is one of the largest most recognizable names in the coffee industry known worldwide. Starbucks has been able to hold onto their business making revenue in these current rough economic times. Even though they have had to shut down some stores it is nothing new than what any other company does when stores are not brining in the revenue that is expected to cover expenses of the business.
To see what kind of impact the decisions that Starbucks has made and to see if they have helped the company at all, there will be several financial statements that will be looked over as well as policies to determine if Starbucks is doing good with their financials. Current Assets affect Cash Management Strategies There are different ways of managing cash; there are strategies that manage cash. Businesses uses cash management strategies to bring in cash as quickly as possible. With cash management strategy help accurately assess your current cash position and make reliable predictions of how much cash you may need in the future.
Because cash management helps a business get more details of their cash position for the future, any calculations of cash is important to the business (Hakala, 2010). The cash management strategies help manages the cash that is being brought into the business. The cash is managed off of the financial statements and the cash flow reports. The current asset would change the details of the financial statements and the cash flow reports. The strategy would then change and give a different prediction. Starbucks current assets are changing every statement which would affect their cash management strategies.
If their current assets were decreasing then it would mean that their cash coming into their business was slowing down. With that prediction, Starbucks would have to manage their assets as well as their cash and cash equivalents differently than what they were doing before they decreased in current assets. Cash and cash equivalents receivable net are the assets of the business that is converted into cash. The total amount of cash equivalent would determine the prediction; in which cash and cash equivalent would be like current assets. They are both counted as cash coming into Starbucks.
According to the Starbucks website; for example, (also shown in Figure 1) in Sep 28, 2008 their cash and cash equivalents were $269. 8 and in March 29, 2009 it was $253. 2. There was a slight decrease in cash and cash equivalents. This would change the cash management strategies of Starbucks for the year 2009. Their inventory has also decreased, from $692. 8 to $627. 8 in 2008 to 2009. Also the prepaid expenses and other current assets decreased as well. The affect here would change the current assets; it caused the current assets to decrease from $1, 748. 00 to $1,604. 0 (Starbucks Newsroom, 2010). The new current assets have now changed the prediction of the strategies on the cash of Starbucks. New strategies would take affect. [pic] Figure 1: Starbucks Corp. Balance Sheet (Starbucks Newsroom, 2010) The inventory of Starbucks is what helps the current assets of the business increased. The inventory that is being sold would increase the current assets which would bring back to a positive increase in the prediction of the cash management. The inventory would affect the cash management strategy when the inventory is decrease or increase.
When the inventory is sold, that would mean that the current assets would increase and the cash flow would increase as well. Starbucks inventory has increase through out the year and would change the cash management strategy if the inventory for Starbucks were to not sell steady like they have been. Prepaid expense is also a type of asset. The results of business making payment for goods and services to be received in the near future are prepaid expenses. The prepaid expenses are recorded as assets and the value turns out to be the benefit that is received on the income statement.
Since the prepaid expenses affect the income statement it would affect the cash management strategy (Prepaid Expenses, 2010). If the prepaid expenses for Starbucks were to decrease the management of cash for prepaid expenses would have to change. Starbucks would not receive the value they would want to receive in their income statement and would increase their prepaid expenses. Starbucks would have to increase their goods and services to receive their prepaid expenses (Prepaid Expenses, 2010). Starbucks has recently changed their management strategies. They are planning to close down “600 stores in the U. S. his year; could be an indication of positive things in the company’s stock prices” (Gilbert, 2010). Starbucks has come up with a new strategy that was affected by the cash and cash equivalent and inventory. Starbucks is selling their 600 stores and old furniture and equipment to recoup their cash. The inventory of Starbucks affects the cash management strategy here. With the stores they keep, Starbucks will upgrade their equipments and furniture and would have to put in more money for the upgrade. With the stores shutting down, they are able to recoup the cash and increase their cash flow (Gilbert, 2010).
Working Capital Recommendations and Impact of Revenue Increase Working capital recommendations refer to an increase of financial investments through the issuance of stocks and bonds. What this does is increase money so Starbucks can use it for restructuring and for the potential of bringing new products and services into the market. According to the Starbucks, (2008) “Increased leverage and/or increases in interest rates may harm the Company’s financial condition and results of operations” (Quantitive and Qualitive Disclosures about Market, para. ). The learning team does not recommend increasing leverage currently. According to Starbucks, (2008) by the end of September 2008, Starbucks had “$5. 1 billion in minimum future rental payments under noncancelable operating leases and $3. 2 billion of total liabilities on a consolidated basis, and aggregate principal indebtedness is included in the total liabilities coming in around $713 million under the outstanding commercial paper” (Quantitive and Qualitive Disclosures about Market, para. 2).
The company 2008 annual report shows the “revolving credit facility borrowings around $550 million” (Quantitive and Qualitive Disclosures about Market, para. 2). In August 2017 the 10-year notes will mature, which is where the borrowings are found. Increasing Starbucks financial obligations could have a negative outcome on the future of the company without the 20% increase of forecasted sales Starbucks should remain fairly stable and will have funds available to pay of debts. Starbucks would see some positive outcomes with the increase.
Some of the positive outcomes the learning team found are the possibility of the company obtaining more financing for working capital, general corporate, and capital expenditures. Starbucks could satisfy their lease obligations, plan or react to changes in the industry, make payments of interest and principal on debts, and bring in enough cash flow to satisfy the company financial obligations. The increase in current liabilities, which was from short-term borrowings the company made were the primary result of why the working capital deficits occurred in 2008.
These measures will be sufficient for Starbucks to satisfy its financial obligations. Because the company will not have to ask for financing, refinance, or sell assets this puts the company in a favorable position because of the 20% increase. Starbucks credit ratings could deteriorate if there were an increase in leverage. If Starbucks has a reduction in their credit rating, this would limit future financing opportunities regardless of the cause, and potentially increase future costs for seeking financing in today’s economy.
Effects of revenue increase on working capital policy The effects of the revenue increase that Starbucks will see on their working capital policy will be helpful to them in some ways and harmful in other. Some of the ways that this will help them is they can have more of a revolving unsecured credit facility to help them with any acquisitions and share repurchases that they may have over the course of the year or years. With their current revenue increases from the stocks and bonds issues mentioned previously this would help them to be able to make these kinds of purchases.
It is very important that Starbucks continues to keep a good credit rating with their supplies due to that if they are to fall below to an unsatisfactory rating this could hurt them by not being able to get the funds that they need financed and or being able to purchase the supplies that they are needing to run their business. If that ever happened to Starbucks they would really have to downsize their locations in order to be able to keep up with the needs of their company.
With the majority of their revenue increase coming from their specialty operations this has helped them with being able to continue their working capital policy which helps them to be able to continue staying strong as the leader of the coffee market. References 2009. Starbucks Newsroom. Retrieved from http://news. starbucks. com/article_display. cfm? article_id=213 (2010). Prepaid Expense. Retrieved from http://www. investopedia. com/terms/p/prepaidexpense. asp Gilbert, Sarah (2008).
Starbucks: Will store closings lift company’s fortunes? Retrieved from http://www. bloggingstocks. com/2008/07/02/starbucks-will-store-closings-lift-companys-fortunes/ Hakala, David (2009). 4 Effective Cash Management Strategies. Retrieved from http://www. focus. com/articles/cash-management/cash-management-strategies/ Starbucks. (2008). Annual Report. Retrieved from http://phx. corporater. net/External. File? item=UGFyZW50SUQ9MTExNzN8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1