Working Capital

If Starbucks has an increase of 20% in its revenue next year, this will affect a number of other elements of the financial statements. Often in budgeting, other line items are assumed to increase roughly in line with revenues. Thus, the company will see revenues of $11,558.4 million next year. Operating expenses will increase by the same percentage, so that the operating profit will also be increased by 20% to $2,073.6 million. However, the assumptions need to build in how much of an increase is expected in same-store sales, because that increase will not translate to certain cost increases. For example, a 20% increase in revenue with 10% coming from an increase in same store sales means that some administration expenses might only have increased 10% in the year. Thus, increases in efficiency will need to be taken into consideration when setting a budget based on an increase in revenues.

If there is an increase in efficiency, this will have implications for the firm's working capital needs. More cash will be generated from the revenues, which should increase the company's working capital. This might offset a higher inventory turnover, if same store sales have increased. In addition, an increase to operations will require the total working capital to increase. More accounts receivable and payable will be generated as the result of this increase, and more inventories will be required as well. Other categories of working capital such as short-term investments will not necessarily increase with this increase in revenues, since they are not directly related to revenues. Increases in accruals such as occupancy costs and taxes payable are likely, however. Starbucks will need to create a pro forma income statement and balance sheet in order to understand how each of these factors results in a change to the working capital as a result of an increase in revenue.