- Thefourth isto base ourchanges on thenoncash
working capital as a percent of revenues over a
historical period. For instance, noncash working
capital asa percent ofrevenuesat Target between
2000 and 2004 averaged 8% of revenues. The
advantage of this approach is that it smooths out
year-to-yearshifts,butitmaynotbeappropriateif
thereis a trend(upwardor downward)in working
capital. - Thefinalapproachistoignoretheworkingcapital
historyofthefirmandtobasetheprojectionsonthe
industry average for noncash working capital as a
percent of revenues. This approach is most
appropriatewhenafirm’shistoryrevealsaworking
capitalthatisvolatileandunpredictable.Itisalsothe
bestwayofestimatingnoncash workingcapitalfor
verysmallfirmsthatmayseeeconomiesofscaleas
theygrow.Whiletheseconditionsdonotapplyfor
Target,wecanstillestimatenoncashworkingcapital
requirements using the average noncash working
capitalasapercentofrevenuesforspecialtyretailers
of 7.54%.
Negative Working Capital (or Changes)
Canthechangeinnoncashworkingcapitalbenegative?The
answerisclearlyyes.Consider,though, theimplications of
suchachange.Whennoncashworkingcapitaldecreases,it
releasestied-upcashandincreasesthecashflowofthefirm.
Ifafirmhasbloatedinventoryorgivesoutcredittooeasily,
managing one or both components more efficiently can
reduceworkingcapitalandbeasourceofpositivecashflows
intothe immediatefuture—three,four, or evenfiveyears.