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Mid Sweden University Department of Social Sciences Business Administration D Master Thesis

Fachhochschule Aachen Fachbereich Wirtschaftswissenschaften Europäischer Studiengang Wirtschaft Diplomarbeit

THE IMPACT OF WORKING CAPITAL MANAGEMENT
ON CASH HOLDINGS


A Quantitative Study of Swedish Manufacturing SMEs

Author: Place of Birth: 1st Examiner: 2nd Examiner: Tutor: Term: Due Date:

Maxime Abel Frankenthal, Germany Prof. Håkan Boter (Mid Sweden University) Prof. Dr. Jürgen Stephan (Fachhochschule Aachen) Dr. Darush Yazdanfar Summer 2008 May 30th, 2008

Abstract
This study examines the impact of working capital management on cash holdings of small and medium-sized manufacturing enterprises in Sweden. The aim of this work is to theoretically derive significant factors related to working capital management which have an influence on the cash level of SMEs and test these in a large sample of Swedish manufacturing SMEs. The theoretical framework for this study consists of a treatise of motives for holding cash, working capital management and cash level. From these theoretical findings, two hypotheses are deduced: • H1: Cash holdings are negatively related to the presence of cash substitutes • H2: Cash holdings are positively related to working capital management efficiency The quantitative investigation consists of the statistical analysis – namely comparison of means and correlation analysis – of key figures which are calculated from the financial statements of a large sample of firms. The dataset contains 13,287 Swedish manufacturing SMEs of the legal form ‘Aktiebolag’. Both hypotheses are confirmed by the results. Empirical evidence is presented which substantiates the supposition that the presence of cash substitutes – namely inventory and accounts receivable – entails lower cash holdings. Furthermore, it is confirmed that working capital management efficiency – measured by the cash conversion cycle – is positively related to cash level. The discussion of the empirical findings pays regard to the different subordinate components of both cash substitutes and working capital management efficiency. Implications of the detected findings are highlighted with respect to their potential utility for the achievement and maintenance of a firm’s target cash level.

II

Table of contents
1 Introduction .......................................................................................1 1.1
1.1.1 1.1.2

Importance of the topic....................................................................... 1 Significance of SMEs .................................................................................... 1 Financial constraints of SMEs....................................................................... 3

1.2
1.2.1 1.2.2 1.2.3 1.2.4

Introduction to this study ................................................................... 4 Problem formulation ...................................................................................... 4 Delimitation ................................................................................................... 5 Objectives ..................................................................................................... 5 Disposition..................................................................................................... 6

2

Theoretical background....................................................................7 2.1
2.1.1 2.1.2 2.1.3 2.1.4 2.1.5 2.1.6 2.1.7 2.1.8

Definition of key terms and concepts................................................ 7 SME............................................................................................................... 7 Cash .............................................................................................................. 8 Working capital.............................................................................................. 8 Marketable securities...
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