Working Capital

Topics: Inventory, Balance sheet, Working capital Pages: 253 (20620 words) Published: November 2, 2014
Effects of Working Capital Management on
Company Profitability
An industry-wise study of Finnish and Swedish public companies

Erik Rehn

Department of Accounting
Hanken School of Economics
Helsinki

2012

HANKEN SCHOOL OF ECONOMICS
Department of:

Type of work:
Master’s Thesis

Accounting
Author: Erik Rehn

Date: 13.3.2012

Title of thesis:
Effects of Working Capital Management on Company Profitability Abstract: Working Capital Management has lately been a hot topic since the financial turmoil of the late 2000’s. Companies search for liquidity and operational efficiency through minimizing their investment in working capital. However, can working capital management add to corporate profitability and shareholder value? This has been studied in this thesis. The efficiency of working capital management can be determined by the cash conversion cycle and the net trade cycle. By testing the two variables with corporate profitability, we can see that Finnish and Swedish corporations can increase their gross operating profitability by reducing the cash conversion cycle and net trade cycle. Also, the different components of the cash conversion cycle have been studied. There is significant evidence that by effectively managing each part of working capital, a company can increase the net present value of its cash flows, thus adding to shareholder value.

Keywords: Working Capital Management, profitability, Net Working Capital, corporate finance, cash conversion cycle, net trade cycle, industry differences

CONTENTS
1 INTRODUCTION...................................................................................... 2 1.1.

Description of the problem area..........................................................................2

1.2.

Problem area and restrictions .............................................................................4

1.3.

Purpose of the thesis ...........................................................................................4

1.4.

The structure of the thesis ................................................................................... 5

2 WORKING CAPITAL ................................................................................ 6 2.1.

Introduction ........................................................................................................6

2.2. Fisher’s separation theorem ................................................................................6 2.3. Working capital in the balance sheet ..................................................................6 2.4. Financing working capital .................................................................................. 8 2.5. Managing working capital ................................................................................. 10 2.5.1.

Accounts receivable............................................................................... 10

2.5.2. Inventory management ......................................................................... 11 2.5.3. Cash management and short-term securities ....................................... 11 2.6. Metrics used in working capital management .................................................. 12 2.7. Working capital management and profitability ................................................ 15 2.8. Chapter summary .............................................................................................. 16

3 PRIOR RESEARCH IN THE FIELD ...................................................... 18 3.1.

Introduction ...................................................................................................... 18

3.2. Measuring working capital management in literature...................................... 18 3.2.1. Working capital efficiency..................................................................... 18 3.2.2. Working capital requirement...

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