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Financial Management
Published in Matt Stevens, John Smolders, Understanding Australian Construction Contractors, 2022
Working capital is determined by subtracting current liabilities from current assets. It measures the funds available for future operations since it is the amount left after meeting current obligations. Working capital may be increased, if necessary, in three ways:Generate and retain operating profits.Borrow money long-term.Selling owned assets and leasing them back to the firm.
Glossary
Published in Stuart M. Rosenberg, The Digitalization of the 21st Century Supply Chain, 2020
It is a financial metric which represents the operating liquidity available to a business, organization, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. Gross working capital is equal to current assets. Working capital is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency.
The impact of working capital management on firm performance and corporate investment
Published in Siska Noviaristanti, Contemporary Research on Management and Business, 2023
Conservative managers overinvest in working capital to protect the firm against fluctuations and increase sales through trade credit by keeping large inventories and receivables (Schiff & Lieber 1974; Tauringana & Afrifa 2013; Wilner 2000). However, overinvestment leads to increased inventory and higher warehouse rental costs, affecting company performance. An increase in trade credits leads to more financing and opportunity costs (Kieschnick et al. 2013; Kim & Chung 1990). On the other hand, underinvestment leads to reduced inventory and warehouse costs, moreover the company's resources are not tied-up to working capital (Tauringana & Afrifa 2013). However, minimum level of investment in working capital leads to low inventory, jeopardizing sales due to limited credit policies (Wang 2002). According to Panda (2018), conservative and aggressive strategies incur a high and low cost of liquidity, respectively. The disproportional feature of working capital management forms a non-linear relationship between working capital and profitability (Panda 2018). The potential benefits and costs of working capital management indicate an optimum balance point for the costs and benefits obtained (Aktas et al. 2015). The cost of underinvestment (overinvestment) will encourage firms to increase (decrease) their working capital investment to reach the optimal point (Banos-Caballero et al. 2012). As a result, the first hypothesis is proposed as follows: H1 (a): Underinvestment in working capital (negative excess NWC) positively affects company performance. Therefore, an increase in the amount of working capital will positively impact company performance.H1 (b): Overinvestment in working capital (positive excess NWC) has a negative relationship with company performance, hence, an increase in the amount of working capital will harm company performance.
Impact of tax difference and asset structure on a capital-constrained vertical equity holding transnational supply chain
Published in International Journal of Production Research, 2021
Mengyu He, Kai Kang, Xiuqing Mu
However, due to a lack of collateral and credit history, or the tenuous nature of their business establishments (Lu and Wu 2020), banks are wary of providing bank credit financing (BCF) to SMEs. One of the primary ways banks evaluate a firm's credit risk is asset structure (Lin and He 2019). Asset structure refers to the proportion of working capital in the firm's total assets, reflecting its liquidity, profitability, and solvency. The lesser working capital a firm possesses, the greater its risk of insolvency. Due to their transaction data and business relationships with SMEs, buyers in the supply chain have a better grasp of SMEs' asset structures and operational capabilities than banks. Therefore, in addition to direct bank financing (DBF), suppliers may also obtain lower interest loans under a buyer's guarantee (GBF). In 2016, Walmart defaulted on the receivables of its suppliers, who then faced a financing dilemma due to low credit ratings. Subsequently, with Walmart's guarantee, ICBC Bank offered the suppliers loans.3 Suning also guarantees a partner's access to bank financing (Lin and Xiao 2018). However, suppliers must provide a guarantee fee to the buyer. Generally, the buyer asks for a wholesale price discount clause to be added to the contract (Zhao and Huchzermeier 2019). The impact of asset structure on the bank financing rate and financing strategy selection is worth exploring.
Value chain perspective on the use of trade credit during the 2006–2015 business cycle – evidence from Eurozone SMEs
Published in International Journal of Logistics Research and Applications, 2019
Perttu Hautala, Harri Lorentz, Juuso Töyli
Recent years have seen an emerging interest towards managing the financial flow in the supply chains and networks of firms (e.g. Hofmann and Kotzab 2010; Wuttke, Blome, and Henke 2013; Wuttke et al. 2013; Lorentz et al. 2016). From the firm-centered perspective, supply chain finance may focus on efforts to improve the net working capital situation (in monetary terms) or the firm’s cash-to-cash cycle (a time-based measure), by improving inventory turns, reducing the accounts receivables (compressing days sales outstanding), or increasing accounts payables (inflating days payables outstanding; e.g. Farris, Theodore, and Hutchison 2003; Randall and Farris 2009). However, as Hofmann and Kotzab (2010) suggest, ‘the exploitation of individual advantages by a single powerful company lowers the overall financial wealth of the supply chain’, and therefore a more holistic chain-spanning or a network approach to supply chain finance should be considered. This implies coordination across firm boundaries in a supply chain context.
Supply-side risk modelling using Bayesian network approach
Published in Supply Chain Forum: An International Journal, 2022
Satyendra Kumar Sharma, Srikanta Routroy, Udayan Chanda
This research indicates that delays in product technology development are the most critical SC risks during a pandemic. Owing to disruptions in SC, OEMs are often forced to change model versions, in which case suppliers’ technological strengths become extremely important. Transportation risks and associated delays are the second most critical factor. Therefore, OEMs should re-plan their supply and transport arrangements to ensure sustainable supply-to-demand points. Profitability affects business continuity, which highlights the importance of working capital management. A lack of sufficient working capital may disrupt SC continuity. Business continuity is also highly sensitive to fuel prices and transport risks. This finding is relevant during peak COVID-19 times, when fuel demand was at an extremely low level and transportation faced substantial challenges. This study has several limitations. The proposed model was constructed considering relevant factors which are deemed to be the most important were included in the proposed model. The inclusion of additional factors would exponentially increase the amount of required data and could overcomplicate the network but may provide more clarity and better results. The prior beliefs applied in the model were based on the current state of the economy and should be regularly updated as conditions change. This research has certain limitation as in data collection through limited experts and exhaustive list of risks is not considerened in the modelling. Similar effectors can be carried out in future to address such gaps. In the future, a substantially comprehensive model may be developed with additional layers in the Bayesian network. Moreover, this study considered the judgements of five experts, although it can be increased to provide a considerably broad expert base, thereby improving data quality. Future studies can also model the effectiveness of risk mitigation strategies, such as safety stock, excess capacity, financial hedging, and centralised control in reducing or eliminating SC disruptions.