5-1 Working Capital Management_AliciaWilkinson
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Alicia Wilkinson
FIN 320: Principles of Finance
Southern New Hampshire University
November 28, 2021
Working Capital Management
To run a successful business, they need to have an understanding of working capital and how to manage it. Utilizing financial reports can assist in assessing the current state of the
business and allow them to evaluate their financial health. There are three main financial statements: income statement, balance sheet, and cash flow statement. An income statement reflects the total net income, a balance sheet shows assets, liabilities, and shareholder equity, and a cash flow statement shows the movement of money in and out of the business. (Chen, 2021)
Working capital can be defined as, “the difference between a company’s current assets…and its current liabilities.” (Fernando, 2021) This is a measure of a company’s short-
term liquidity, meaning the liquid assets that remain after all of the short-term liabilities have been paid. By knowing and understanding the company’s working capital, they can make decisions easier knowing what funds they have to pay their bills or make investments. The balance sheet is the most helpful when identifying working capital because it includes the current asset and liabilities listed out. (Fernando, 2021)
The formula for working capital is ‘working capital = current assets – current liabilities.’ The company that I chose to research was Target, which is a general merchandise retailer containing a variety of general merchandise ranging from apparel and home décor to
seasonal items and even food. Using Mergent Online data was available from 10/31/2021 for Target’s third quarter. Per the balance sheet, I was able to identify Target’s current assets and current liabilities to be able to calculate the working capital.
Current Assets – Current Liabilities = Working Capital
22,576,000.00 - 23,351,000.00 = (775,000.00)
Since Target’s working capital is a negative number, I would say that the company is not liquid right now. Since the current liabilities are more than the current assets, they do not have a cash inflow and could potentially end the year in the negative. There are many factors that could be contributing to the negative working capital that Target has at the end of Q3. The pandemic, supply chain, and upcoming holidays could certainly be impacting the company’s numbers. Even though Q3 was negative, there is a chance that all of the shopping that will be done in the upcoming quarter could overcompensate for the negative Q3. If I compare the Q3 numbers from 2020, Target had a positive working capital of $952,000.00. I think that this shows that their numbers are generally in the positive and that there
is some outside source that is creating this negative result.
References
Chen, J. (2021, November 20). Income statement
. Investopedia. Retrieved November 28, 2021, from https://www.investopedia.com/terms/i/incomestatement.asp. Fernando, J. (2021, November 20). What is working capital?
Investopedia. Retrieved November 28, 2021, from https://www.investopedia.com/terms/w/workingcapital.asp. Mergent. (2021, November 28). Target
. Retrieved November 28, 2021, from https://www.mergentonline.com/login/php
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