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