This book integrates Working Capital Management, Trade Credit, and Supply-Chain Finance in a comprehensive framework, illustrated by dozens of case studies, including a leading case which explains how improved working capital practices have led to over U$1 billion in savings for a large company. The General Model of Working Capital Management consolidates the aspects of these subjects spread across different disciplines, such as finance, accounting, operations, marketing, and more. It includes enough material to make the book accessible to a broad audience, from introductory undergraduate courses to business executives. Offering managerial lessons to optimize companies’ cash flow, case studies run the whole gamut, from the small business owner who cried in an executive class when realizing how bad working capital management almost destroyed his business to the significance of Amazon's and Tesco's negative cash conversion cycle for their expansion. Formal models include the relationship between market power and value extraction through changes in payment terms for consumers and suppliers, in-kind finance, and trade credit with asymmetric competing retailers. The book also explores how just-in-time strategies developed under capital constraints to limit working capital investments; they are more than the search for production efficiency. Finally, the chapter about the greening of supply chains describes how companies that can extract resources from their supply chain or act as trade credit lenders have a crucial role in mitigating climate change.
Author(s): Rodrigo Zeidan
Publisher: Palgrave Macmillan
Year: 2022
Language: English
Pages: 276
City: Cham
Acknowledgments
Contents
List of Figures
List of Tables
1 Introduction
2 Why the General Model of Working Capital Management? The U$1 Billion Question
2.1 MRV and the Billion-Dollar Gains
References
3 The General Dynamic Model of Trade Credit
3.1 The Basics of the Financial Cycle
3.2 Building Dynamics: Operating Working Capital and Working Capital Requirements
3.2.1 The Crying CEO
3.3 Working Capital and Firm Value: A Simple Framework
3.4 Operating Working Capital: The Central Concept in Working Capital Management
3.5 An Initial Step-By-Step Guide to Estimating Operating Working Capital
3.5.1 An Example of Financial Cycle and OWC Indicators
3.6 Ideal vs. Accounting Processes and Their Implications
3.6.1 Should Safety Stocks Be Part of the Operating Working Capital Calculations?
3.6.2 Lean Accounting Management Practices
3.7 Long-Term Dynamics, Life-Cycle, and Working Capital Policies
3.7.1 Which Working Capital Strategies Matter During Firms’ Life Cycles?
3.7.2 Mature Liquidity Management and Limiting x-Inefficiency: The Apple Wall
3.7.3 Illiquidity Events
3.7.4 Arbitraging in Future Markets: Margin Calls and the Perilous Competitive Advantages of SOEs
3.8 In-Kind Finance: The Burkart and Ellingsen Model
3.8.1 Credit Rationing
3.8.2 Credit Substitution and Credit Volume
3.8.3 Credit Limits from Banks and Entrepreneurs
3.8.4 The Limits of Traditional Liquidity Ratios
References
4 Market Power and Working Capital Optimization
4.1 Determinants of Working Capital
4.2 Transaction Costs
4.3 Simulations on Working Capital Changes
4.3.1 Boundary Conditions
4.3.2 Parameters and Paths
4.3.3 Simulating Firm Behavior
4.3.4 Empirical Evidence
4.4 The Managerial Lessons
4.4.1 Mondelez and the (Ab)use of Market Power?
4.5 The Information Content of Trade Credit
4.6 Trade Credit, Relationship-Specific Investment, and Product Market Power
4.7 Trade Credit, Supplier Competition, and Risk-Sharing
References
5 The Archetypes: From Mature, Single-Product Companies to Cash-Constrained Organizations
5.1 Positive CCC and Sales Growth: The Retailer
5.1.1 Ownership of Managerial Targets: Sem Parar
5.2 Positive CCC and Stable Revenue: The Brick-a-Brack Store
5.3 The Small Volume Service Company
5.3.1 The Downsizing Decision
5.3.2 Bootstrapping
5.4 Supermarkets and the Implications of Negative Cash-Conversion Cycles
5.4.1 Exponential Growth: Sustainable Business Models or Ponzi Schemes?
5.4.2 Tesco: Why a Negative Financial Cycle Matters
5.4.3 The Adjusted Inventory Turnover
5.4.4 Corporate Hoarding and the Bullwhip Effect
5.5 Dancing with the Wolves: The Multinational Corporation
5.5.1 Bank Credit and Corporate Working Capital Management
5.6 The Effects of Transitions Between Archetypes on Cash-Flow and Firm Survival
5.6.1 Who is Stealing from Me?
5.7 Fraud, Moral Hazard, and Seedy Working Capital Strategies
References
6 The Managerial Decisions
6.1 Minimizing Bankruptcy Costs
6.1.1 Sales Volatility
6.1.2 The Conservative Strategy
6.1.3 The Aggressive Strategy
6.1.4 Personality Traits and the Role of National Culture on Trade Credit Decisions
6.2 Working Capital Buffering
6.3 When Should a Company Borrow, and the Options to Fund Working Capital?
6.4 Trade Credit Finance, Factoring, Discounted Trade Bills, and Anticipation of Receivables
6.5 Operating Margin or Extended Payment Terms
6.5.1 The Reputational and Long-Term Risks of Negative Cash-Conversion Cycles
6.5.2 Nudge
6.5.3 Limiting Working Capital Investments: Just-In-Time
References
7 Building a Comprehensive Working Capital Strategy
7.1 The Basics of DSO and DPO Management
7.2 MRV: DIO and DPO Management to Unlock U$1 Billion
7.3 Classifying Suppliers and Customers to Change DPO and DSO
7.4 Managing DIO
7.5 An Example of Changing Practices
7.6 Empowerment and the Correct Incentives
7.6.1 Discretions vs. Rules: The Case of a Multinational Pharmaceutical Company
7.6.2 Aligning Incentives: The C-Suite Dilemma in a Large Steel Company
7.7 Adjustments to Regulatory Changes
References
8 Building Managerial Cash-Flow Statements for Budgeting Working Capital Investments
8.1 The Basics of Cash-Flow Statements
8.2 Setting Up an Operational Working Capital Statement
8.3 The Working of Working Capital Requirements
8.4 The Sustainability Delta, or How Green Investments Can Increase Shareholder Value
8.5 Amazon and Growth Through Negative Cash-Conversion Cycles
8.5.1 Amazon Prime, the Whole Foods Acquisition, and the Value of Constant Inflows
8.6 Multi-Product
8.7 Methods For Estimating DIO For Multi-Product Firms
8.7.1 Optimal Inventory Turnover, Does it Exist?
8.7.2 Is It Possible for DIO to Be a Negative Number?
8.8 Methods For Estimating DPO and DSO For Multi-Product Firms
References
9 Greening Supply Chains and the Role of Working Capital Management
9.1 With Great Profits Comes Great Responsibility
9.1.1 The Poultry Industry
9.2 Standards as Commitment Devices
9.3 Trade Credit and Climate Change
9.4 Low-Value Equilibrium in Supply Chains
9.5 Trade Credit, the Covid Pandemic, and Company Survival
References
10 Formal Models on Trade Credit
10.1 Trade Credit Contracts
10.1.1 Trust and Supply-Chain Finance: How a Japanese Retailer Limits Moral Hazard
10.2 A Trade Credit Model with Asymmetric Competing Retailers
10.3 The Price of Reverse Factoring
References
Index
