When forecasting the noncash working capital needs for
Target, we have several choices.
- Onemethodistousethechangeinnoncashworking
capitalfromtheyear($435million)andtogrowthat
changeatthesamerateasearningsareexpectedto
growinthefuture.Thisisprobablytheleastdesirable
optionbecausechangesin noncashworking capital
from year to year are extremely volatile and last
year’s change may in fact be an outlier. - The second is to base our changes on noncash
workingcapitalasapercentofrevenuesinthemost
recent yearand expected revenuegrowth in future
years.InthecaseofTarget,thatwouldindicatethat
noncashworkingcapitalchangesinfutureyearswill
be8.67%ofrevenuechangesinthatyear.Thisisa
muchbetteroptionthanthefirstone,butthenoncash
working capital as a percent of revenues canalso
change from one year to the next. - The third is to base our changes on the marginal
noncashworkingcapitalasapercentofrevenuesin
the most recent year, computed by dividing the
changeinnoncashworkingcapitalinthemostrecent
yearintothechangeinrevenuesinthemostrecent
yearandexpectedrevenuegrowthinfutureyears.In
the case of Target, this would lead to noncash
workingcapitalchangesbeing9.15%ofrevenuesin
futureperiods. Thisapproachisbest usedforfirms
whose business is changing and where growth is
occurring in areas different from the past. For
instance,a brick-and-mortarretailerthatisgrowing
mostly online may have a very different marginal
working capital requirement than the total.