Given the troubling condition of Starbuck’s liquidity and activity ratios, the paper proposes several recommendations to improve the company’s financial health.
The paper recommends that the company should not expand so aggressively and that it should free up some working capital, including cash and marketable securities for day-to-day operations, and closely monitor their liquidity ratios. The paper then explains that Starbucks should make some important changes to their sources and uses of short term financing. Finally, the paper recommends that the company should make some changes to their inventory policies and gives examples of these changes.
A cash ratio is simply a measure of a company’s cash and marketable securities in relation to their current liabilities. Starbuck’s cash ratio declined steadily from 1997 to 2000, with a small (0.08) jump in 2001. In every year since 1998, the ratio has been below 1.0. A ratio below 1.0 indicates that a firm may not be able meet it’s financial obligation, as it does not have enough readily available cash and securities on hand to meet their current liabilities.