CVS Caremark is the largest healthcare providers in the United States. CVS has over seven thousand retail pharmacy stores countrywide. The company is divided into pharmacy services and retail services. The mission statement: improve the lives of those we serve by making innovative and high-quality health and pharmacy services safe, affordable and easy to access. Vision statement: We strive to improve the quality of human life. Strategy: reinventing pharmacy. Purpose: helping people on their path to better health. Values: Innovation, collaboration, caring, integrity, and accountability (Nathan, n.d.). This paper is going to center on CVS Caremark’s objectives for improving its financial position, the performance metrics, targets, and actions.
Three objectives can be used to improve the financial position of the company. Firstly, the company should aim at improving its working capital so that it cannot become bankrupt by being unable to settle debts in the short term. The working capital ratio for CVS Caremark is 1.37 as at 31st December 2014 (corp, 2015), which is relatively low. The second objective would be to increase equity financing and reduce debt financing. Debt financing has an effect of reducing the earnings and can lead to additional interest expense. As at 31st December 2014, the Debt to Equity ratio for CVS Caremark was 0.96, (corp, 2015). Lastly, the company should increase its revenues and reduce the cost of goods sold. The gross profit margin for CVS Caremark as at 31st December 2014 was 18% (corp, 2015). This is relatively low.
The objectives that are set can be measured using financial metrics. Financial metrics are mainly concerned with the financial statements of CVS Caremark i.e., the income statement, the cash flow statement and the balance sheet. For the first objective, the financial metric to be used is the liquidity metrics which address short term financial obligations. The company’s working capital ratio is referred to as current assets divided by current liabilities. The working capital of the company is not that off, but it needs to improve in order to meet short term obligations efficiently. The second objective’s financial metric is leverage metrics i.e., the debt to equity ratio (D/E). The D/E is used to measure the degree to which a company either uses debt financing or equity financing. A high debt to equity ratio is not good for business as it may lead to insolvency. The third objective financial metric is profitability metric i.e. gross profit margin. As stated earlier, the gross profit margin for CVS Caremark is relatively low, and it needs to increase it to provide a better health care.
The target for the first objective is to increase the working capitals that will in turn increase the working capital ratio. The working capital should be greater than or equal to two. In simple terms, this will involve increasing the currents and decreasing the current liabilities. The actions to be taken include; issuing stocks and preferred stocks for cash, selling long term assets for cash and replacing long term debts with short terms debts. All these actions have the effect of increasing cash and reducing short term debts. The target for the second objective is to increase equity financing and reducing debt financing. The D/E ratio should be 0.5 or below, this can be achieved by; restructuring debt, bringing in investors, better management of inventory and, increasing sales revenue and profitability. The target of the third objective is to increase the gross profit margin by more than 50%, this can be achieved by lowering the cost of goods sold (e.g. by finding cheaper suppliers, outsourcing, and quality and cheap raw materials), and increasing both the sales and the selling price.
In conclusion, all the three objectives are meant to enable CVS Caremark to run efficiently by ensuring it is financially sound and able to carry out its day to day operations business. With a high level of profit margin and minimum debts, CVS Caremark will be able to provide high quality health services due to less financial obligations and more funds at their disposal. The table below shows a summary of the study.
Improve working capital
Increase working capital to greater than or equal to two
- Issuing stocks and preferred stocks for cash
- Selling long term assets for cash
- Replacing short term debts with long term debts
Increase equity financing
The D/E equal to or less than 0.5
- Restructuring debt
- Bringing in investors
- Better inventory management
- Increase sales revenue
Increasing the gross profit
Increase the gross profit margin by more than 50%
- Lowering cost of goods sold
- Increasing sales volume
- Increasing selling price