Working Capital Management: Concepts and Strategies

Contents
About the Editors
About the Authors
Acknowledgments
Part 1 Foundations of Working Capital Management
Chapter 1 Working Capital Management: An Overview
1.1 Introduction
1.2 About the Book
1.2.1 Purpose
1.2.2 Distinguishing features
1.2.3 Intended audience
1.3 Structure of the Book
1.3.1 Part 1: Foundation of Working Capital Management
1.3.2 Part 2: Cash Management
1.3.3 Part 3: Other Aspects of Working Capital Manage
1.3.4 Part 4: Special Topics in Working Capital Managemen
1.4 Summary and Conclusions
References
Chapter 2 Determinants of Working Capital Management
2.1 Introduction
2.2 Determinants of Working Capital
2.2.1 Firm-specific factors
2.2.1.1 Firm size
2.2.1.2 Leverage
2.2.1.3 Cash flow
2.2.1.4 Profitability
2.2.1.5 Asset tangibility
2.2.1.6 Growth opportunities
2.2.1.7 Firm age
2.2.1.8 Financial distress
2.2.1.9 Managerial ability
2.2.2 Industry-specific factors
2.2.2.1 Median industry cash cycle
2.2.2.2 Market share
2.2.2.3 Ownership structure
2.2.2.4 Litigation risk
2.2.3 Macroeconomic factors
2.2.3.1 Access to funds
2.2.3.2 Financial constraints
2.3 Summary and Conclusions
Discussion Questions
References
Chapter 3 Characteristics of Working Capital Management Strategies
3.1 Introduction
3.2 Seasonality
3.2.1 Affected industries
3.2.2 Identifying seasonality
3.3 Strategies
3.3.1 Conservative strategies
3.3.2 Aggressive strategies
3.3.3 Moderate/Hedging strategies
3.3.4 Zero net working capital approach
3.4 Sustainable Growth
3.5 Additional Funds Needed
3.6 Summary and Conclusions
Discussion Questions
References
Chapter 4 Working Capital Measures and Metrics
4.1 Introduction
4.2 Activity Ratios
4.3 Liquidity Ratios
4.4 Profitability and Solvency Ratios
4.5 Working Capital Financing Arrangements
4.5.1 Accounts receivable
4.5.2 Accounts payable
4.6 Longitudinal vs. Cross-Sectional Ratio Analysis
4.6.1 Brief longitudinal and cross-sectional evaluation of Embotelladora Andina’s CCC
4.7 Limitations of Ratio Analysis
4.7.1 Accounting standards and policies
4.7.2 Accounting elections and judgment
4.7.2.1 Cost allocation and classification
4.7.2.2 Fiscal period differences
4.7.2.3 Earnings management
4.7.2.4 Inventory cost flows
4.7.3 Operational characteristics
4.7.4 Aggregated data
4.8 Summary and Conclusions
Discussion Questions
References
Chapter 5 Impact of Working Capital Management on Firm Profitability and Performance
5.1 Introduction
5.2 Working Capital Management and Firm Performance
5.2.1 Background on WCM
5.2.2 Working capital measures
5.3 Empirical Evidence on WCM and Firm Performance
5.3.1 Evidence from developed markets
5.3.1.1 The United States
5.3.1.2 Belgium
5.3.1.3 Spain
5.3.1.4 The United Kingdom
5.3.1.5 Japan
5.3.1.6 Australia
5.3.2 Evidence from developing markets
5.3.2.1 European developing markets
5.3.2.2 Asian developing markets
5.3.2.3 African developing markets
5.4 Summary and Conclusions
Discussion Questions
References
Part 2 Cash Management
Chapter 6 Cash Management and Models
6.1 Introduction
6.2 The Baumol Model
6.2.1 Case 1: Average cash level in Baumol model
6.2.2 Case 2: Baumol model between October and January
6.3 The Beranek Model
6.3.1 Case 3: Beranek model between April and May
6.4 The Miller–Orr Model
6.4.1 Case 4: Miller–Orr model in June–September period
6.5 The Stone Model
6.5.1 Case 5: Cash management in February and March
6.5.2 Case 6: Cash estimates in March–May period
6.6 Summary and Conclusions
Discussion Questions
Acknowledgment
References
Chapter 7 Cash Forecasting
7.1 Introduction
7.2 Inputs and Assumptions
7.2.1 Revenues and expenses
7.2.2 Accounts receivable
7.2.3 Inventory
7.2.4 Accounts payable
7.2.5 Other current liabilities
7.2.6 Short-term debt
7.3 Model Setup and Assumptions
7.4 Scenario Analysis
7.5 Uses and Limitations
7.6 Summary and Conclusions
Discussion Questions
References
Chapter 8 Investing Surplus Cash and Short-Term Borrowing
8.1 Introduction
8.2 US Treasury Bills
8.2.1 Competitive bids
8.2.2 Non-competitive bids
8.3 Commercial Paper
8.3.1 Market size
8.3.2 Commercial paper risks
8.3.2.1 Credit risk
8.3.2.2 Liquidity risk
8.3.2.3 Interest rate risk
8.3.2.4 Inflation risk
8.4 Repurchase Agreements
8.5 Working Capital Facilities
8.5.1 Revolving credit line
8.5.2 Swingline loans
8.5.3 Letters of credit
8.5.4 Lender diligence
8.5.5 Pricing and fees
8.5.6 Reporting requirements
8.6 Summary and Conclusions
Discussion Questions
References
Chapter 9 Cash Management and Fraud Prevention
9.1 Introduction
9.2 History of Financial Fraud
9.2.1 Examples of financial fraud
9.2.2 Methods used to commit fraud
9.3 The Meaning and Motivation of Fraud
9.4 Common Fraud Indicators — The Red Flags
9.5 Insights into Fraud Detection and Prevention Methods
9.5.1 Detecting and preventing asset misappropriation
9.6 Taking Action: Guarding Against Fraud
9.7 Summary and Conclusions
Discussion Questions
References
Chapter 10 Managing Banking Relationships
10.1 Introduction
10.2 Bank Account Management
10.3 RFI or RFP Process
10.4 Banking Fee Structure and Negotiations
10.5 Information Flows and Periodic Reviews
10.6 Bank Relationship Management
10.7 Systems and Technology Integration
10.8 New Technology and the Impact of Fintech on Corporate Banking
10.8.1 Corporate banking for small- and medium-sized enterprises
10.8.2 Technology advancements in banking
10.8.3 Fintech opportunities
10.8.4 Legacy corporate bank defenses vs. fintech competitors
10.8.5 Decentralized finance, cryptocurrencies, and non-fungible tokens
10.9 When the Going Gets Tough
10.9.1 Case Study #1: Curtains almost fall on a customd rape maker
10.9.2 Case Study #2: A high-end luxury shoemaker stumbles
10.9.3 Case Study #3: Sailing with banks through stormy times
10.10 Summary and Conclusions
Discussion Questions
References
Part 3 Other Aspects of Working Capital Management
Chapter 11 Accounts Receivable Management
11.1 Introduction
11.2 Accounts Receivable and Credit Policies
11.2.1 Other types of AR
11.2.2 Credit manager and credit policy
11.2.3 Other roles in the credit process
11.3 Strategies for Improving ARM
11.3.1 AR’s role in the operating cycle and cash conversion cycle
11.3.2 Strategies for monitoring AR
11.3.3 Strategies for improving the collection process
11.4 Trade Credit
11.4.1 History of trade credit
11.4.2 Growth of trade credit
11.4.3 Trade credit: Firm size and country
11.5 Determinants and Theories for the Provision of Trade Credit
11.5.1 Transaction cost reduction theory
11.5.2 Financing theory
11.5.3 Bargaining power and price discrimination theory
11.5.4 Relationship building and product theories
11.6 Summary and Conclusions
Discussion Questions
References
Chapter 12 Inventory Management
12.1 Introduction
12.2 Inventory Management
12.2.1 Simple inventory monitoring methods
12.2.2 Economic order quantity model
12.2.3 Case 1: Basic raw material for production
12.2.4 Case 2: The batch of an order
12.2.5 Case 3: Bakery purchases
12.2.6 Case 4: Titanium connectors
12.3 Production Order Quantity Model
12.3.1 Case 5: Determining a firm’s optimum production lot
12.3.2 Case 6: Untimely deliveries
12.3.3 Suppliers’ portfolio
12.3.4 Portfolio of two suppliers or groups of suppliers
12.3.5 Case 7: Portfolio-based choice
12.3.6 Case 8: Negatively correlated suppliers
12.4 Summary and Conclusions
Discussion Questions
Acknowledgment
References
Chapter 13 Accounts Payable Management
13.1 Introduction
13.2 Accounts Payable
13.2.1 Terms of accounts payable
13.2.2 Operational accounts payable
13.2.3 Accounts payable usage in select US industries
13.2.4 Services
13.2.5 Manufacturing and production
13.2.6 Retail related
13.2.7 Trade payables in Sweden
13.2.8 Regression results
13.2.9 Direct cost of using accounts payable financing
13.2.10 Monitoring accounts payable
13.3 Payment Methods
13.4 Summary and Conclusions
Discussion Questions
References
Chapter 14 Linkages Across Firms in the Supply Chain
14.1 Introduction
14.2 Cost and Types of Trade Credit
14.3 Reasons Behind Trade Credit
14.4 Amount of Trade Credit and Trends
14.5 Working Capital Optimization and Collaboration
14.6 Accounts Receivable Financing
14.7 Summary and Conclusions
Discussion Questions
References
Chapter 15 Payment Processing
15.1 Introduction
15.2 Payment Processing and Business-to-Business (B2B) Transactions
15.3 What is a Payment Processor?
15.4 The Rise of Payment Processing
15.4.1 Safety
15.4.2 COVID-19
15.5 How Does Payment Processing Work?
15.5.1 Players
15.5.2 Payments
15.5.3 Pricing
15.5.4 Payment processing and the investment management industry
15.6 The Future of Online Transactions
15.6.1 Retail transactions
15.6.2 Capital-market transactions
15.6.3 Problems and potential solutions
15.7 Summary and Conclusions
Discussion Questions
References
Part 4 Special Topics in Working Capital Management
Chapter 16 Industry Differences in Working Capital Management
16.1 Introduction
16.2 Basic Corporate Finance Relationships
16.2.1 Technology
16.2.2 Size
16.2.3 Financing cost
16.3 Industry-Specific Working Capital Issues
16.3.1 Construction
16.3.2 Mining
16.3.3 Manufacturing
16.3.4 Transportation
16.3.5 Retail
16.3.6 Finance
16.3.7 Professional services
16.4 Summary and Conclusions
Discussion Questions
References
Chapter 17 Working Capital Management in Developing Countries
17.1 Introduction
17.2 Working Capital Management Practices
17.2.1 Working capital financing
17.2.2 Inventory management practices
17.2.3 Cash management practices
17.2.4 Receivables management practices
17.3 Working Capital Metrics and Performance in Developing Countries
17.3.1 Days sales outstanding
17.3.2 Days inventory on hand
17.3.3 Days payables outstanding
17.3.4 Cash conversion cycle
17.4 Determinants of Working Capital Management
17.4.1 Firm size
17.4.2 Leverage
17.4.3 Firm age
17.4.4 Growth opportunities
17.4.5 Operating cash flow
17.4.6 Nature of industry
17.4.7 Level of economic activity
17.5 Summary and Conclusions
Discussion Questions
References
Chapter 18 Working Capital Management in an International Context
18.1 Introduction
18.2 Literature Review
18.3 Data and Methodology
18.3.1 Data
18.3.2 Methodology
18.4 Empirical Results
18.5 Summary and Conclusions
Discussion Questions
References
Chapter 19 Information Technology and Working Capital Management
19.1 Introduction
19.2 History of Information Technology in Corporate Finance
19.3 Payments and Banking Technologies
19.4 Wire Transfers and Electronic Payments
19.4.1 Fedwire and the automated clearing house
19.5 SWIFT
19.5.1 E-commerce and internet banking technology
19.6 ERP Systems
19.7 Data Analytics and Fintech Solutions in Working Capital Management
19.7.1 Fintech and working capital management
19.8 Cyber Risks and Information Security
19.9 Summary and Conclusions
Discussion Questions
References
Chapter 20 Enterprise Risk Management
20.1 Introduction
20.2 An Expanded View of ERM
20.3 ERM’s Purpose, Objectives, and Frameworks
20.4 Differences Between TRM and ERM
20.4.1 Value proposition of ERM initiatives
20.4.2 Creating a risk management checklist
20.5 Enterprise Resource Planning
20.5.1 A brief history of ERP systems
20.5.2 Reasons for ERP failure and strategies to increase success
20.5.3 Challenges faced when failing to adequately share information
20.5.4 Value proposition of ERP implementation
20.6 ERM Framework Solutions for WCM
20.7 Summary and Conclusions
Discussion Questions
References
Chapter 21 Trends in Working Capital Management
21.1 Introduction
21.2 Technology
21.2.1 Real-time treasury management
21.2.2 Robotics, artificial intelligence, and financial relationship management
21.3 Dynamic Discounting
21.4 Using Data Analytics in Retail: The Case of Zara
21.4.1 Sustainable supply chain management
21.4.2 Lean WCM in an age of globalization and a global pandemic
21.4.3 Made in America
21.5 The Size Effect
21.6 Working Capital Management Councils
21.7 Summary and Conclusions
Discussion Questions
References
Glossary
Discussion Questions and Answers
Index