Financial and Operating Working Capital: Unraveling Obscured Portion of Balance Sheet

ABSTRACT Purpose- The purpose of this study is to provide a new obscured aspect of financial working capital in working capital management, and investigate the association between financial and operating working capital with business performance. This paper also examines the interacting effect of net cash flow on this relationship. The current study introduces a modification in cash conversion cycle (CCC) by taking concealed trade advance payments. Design/methodology/approach- This study employs fixed effect regression model, covering a sample of Automobile sector companies, listed at Pakistan Stock Exchange (PSX) for the period of fourteen years from 2005 to 2018. Secondary data is collected from companies’ financial annual reports, PSX website, and Balance sheet analysis of State Bank of Pakistan (SBP). The study is explanatory and deductive in nature. Financial working capital (FWC) and new measure of operating working capital (OWC) i.e. modified cash conversion cycle (mCCC) is introduced & empirically tested with 252 firm-year observations. Findings- The regression results shows, a convex association between OWC & FWC, with business performance, in dearth of internal cash. However, after taking interacting effect of internal availability of cash, only FWC relation has become concave. The result also shows that mCCC provides a more realistic view of OWC. Research limitations/implications- This study has considered, concealed trade prepayments only, further research could include other components in mCCC. Moreover micro, macro factors and status of the economy such as depression or boom may also affect the results of the research. The findings suggest that managers should separately deal operating & financial working capital. Firms’ performance can be enhanced, if Finance Manager Take account internal cash of the firm. In case of deficiency (sufficiency) of it, he should work to decrease (increase) the investment amount in operating working capital (financial working capital). Overall, the results will be helpful to the financial experts and business practitioner in analyzing, and utilization of their resources. Originality/value- This study adds a new dimension in working capital by separating it into operating and financial working capital. The study also offers insights into the new knowledge of extension in CCC, role of concealed advance payments and internal cash flow, for class teachers and business practitioners. It will also describe the new avenues for further research in this field. Key Words: Financial working capital, Operating working capital, Trade advanced payments and modified cash conversion cycle (mCCC).

Allocation of Internal Cash Flow when Firms Pay Less Tax

ABSTRACT We provide evidence about allocations of cash flow freed up by not paying taxes (“tax-related cash”). Uncertainty about future repayments suggests firms may use tax-related cash more cautiously than other cash flow. We utilize a flow-of-funds model from finance to quantify the relative amounts of tax-related cash associated with various potential uses of operating cash flow. We find firms allocate tax-related cash differently than other after-tax cash flow. Prior studies find tax avoiders hold more cash, and our results suggest this is because firms invest less (and save more) tax-related cash. We also find that the allocation of tax-related cash varies with relative financial constraints, economic uncertainty, and firms' multinational status in ways consistent with prior findings. For example, firms facing relatively higher levels of financial constraints invest a lower (higher) percentage of tax-related cash in capital expenditures (marketable securities and R&D), possibly to preserve funds for future investment opportunities. JEL Classifications: G31; H20.

Monetary Policy, Cash Flow and Corporate Investment: Empirical Evidence from Vietnam

This paper examines the relationships between macroscopic determinants (typically, monetary policies) and microscopic factors (mainly, cash flows and other controlling variables) on corporate investment. By employing system-GMM estimation for the 250 Vietnamese non-financial firms, the authors find that the expansionary monetary policy not only encourages the borrowing activities but also results in more corporate investment activities over the period from 2006 to 2016. Noticeably, the internal cash flow is also significant factor, which enhances the activities of corporate investment. Finally, there are differences between internal cash flow effects on corporate investments between two groups, divided by three theoretical criteria. To recapitulate, our implications highlight the importance of monetary policy stability for sustainable growth in corporate investment in Vietnam.

DEFISIT VS SURPLUS FINANSIAL DAN KETERKAITANNYA DENGAN STRUKTUR MODAL

Keputusan pendanaan merupakan kombinasi pendanaan jangka panjang dan jangka pendek dengan mempertimbangkan kemampuan membayar biaya modal kepada investor. Salah satu faktor dipertimbangkan sebelum menambah sumber dana adalah kondisi defisit vs surplus finansial sehingga tujuan riset mengekplorasi kondisi tersebut serta keterkaitanya dengan perubahan struktur utang. Pertama mengidentifikasi kondisi defisit vc surplus finansial berdasarkan pembayaran dividen, investasi jangka panjang, modal kerja bersih dan internal cash flow. Kedua membandingkan jumlah rata-rata penambahan utang jangka panjang antara kondisi surplus dengan deficit. Ketiga menguji efek indikator serta kondisi defisit financial terhadap perubahan utang. Dilakukan observasi 292 sektor manufaktur terdaftar di BEI periode 2008-2013 dengan hasil yaitu: (1) Terdapat perbedaan rata-rata perubahan utang jangka panjang antara deficit dengan surplus keuangan, (2) Terdapat pengaruh signifikan 1% diantara indikator deficit keuangan terhadap perubahan utang. (3) Deficit financial berpengaruh positif signifikan 1% terhadap perubahan utang. Hasil mengidentifikasi pentingnya deteksi kondisi financial untuk memonitor perubahan struktur utang. Terakhir, disimpulkan bahwa strategi pendanaan belum sepenuhnya menganut pecking order theory, melainkan terjadi kombinasi dengan trade off models.

A Study on Financial Constraints of Capital Structure Theories and Dividend Policy: Evidence from Indian Capital Market

The study focused on the ability of firms to play this role is in major part determined by the structure of the financial system in which they operate, and in particular whether this financial system is able to make capital available efficiently to those firms that need it. The study examines the relation between the Financing, Investments, Capital Budget and Dividend decisions, where the effect of financial constraints on the firm’s investment decision is investigated. The study focuses on how financial constraints affect different firms by investigating the extent to which the dependence on internal cash flow is affected by firm characteristics such as size, age, dividend payout ratio, and market listing. This implies that firms retain earnings (RE) in order to ensure that they have sufficient capital to invest, confirming the initial result that Indian firms are financially constrained. This study adopted a descriptive design that aims at exploring the financial constraints of dividend policy and capital structure theories of companies listed at NSE and BSE in India. The data was obtained from financial statements and balance sheet of all the listed companies’ information available at the NSE and BSE secretariat for 10 years from 2005 to 2015.

Hospital Capital Investment During the Great Recession

Hospital capital investment is important for acquiring and maintaining technology and equipment needed to provide health care. Reduction in capital investment by a hospital has negative implications for patient outcomes. Most hospitals rely on debt and internal cash flow to fund capital investment. The great recession may have made it difficult for hospitals to borrow, thus reducing their capital investment. I investigated the impact of the great recession on capital investment made by California hospitals. Modeling how hospital capital investment may have been liquidity constrained during the recession is a novel contribution to the literature. I estimated the model with California Office of Statewide Health Planning and Development data and system generalized method of moments. Findings suggest that not-for-profit and public hospitals were liquidity constrained during the recession. Comparing the changes in hospital capital investment between 2006 and 2009 showed that hospitals used cash flow to increase capital investment by $2.45 million, other things equal.

Finance and R&D Investment: A Panel Study of Italian Manufacturing Firms

<p>The purpose of this study is to examine the role of different sources of finance on R&amp;D investment decisions in Italian manufacturing firms. Accounting data, taken from the Aida database, are collected over the 2006-2013 years. The empirical evidence shows that the availability of external financing primarily affects the decision to engage in R&amp;D activity rather than R&amp;D intensity. Internal cash flow, on the contrary, does affect both the likelihood of whether firms will undertake any R&amp;D and the size of R&amp;D spending. This impact is strongly significant for financially weaker firms, SMEs and high-tech firms. Due to greater asymmetric information problems, small innovative firms mainly rely on cash-flow to finance innovative projects. Since bank loans and other forms of debt are not well suited for R&amp;D-intensive activities, our study would contribute to the debate whether it might be socially desirable to incentivize alternative small business financing options, still limited in Italy.</p>