Value-Based Working Capital Management

Transcription

1 Value-Based Working Capital Management

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3 Value-Based Working Capital Management Determining Liquid Asset Levels in Entrepreneurial Environments Grzegorz Michalski

4 value-based working capital management Copyright Grzegorz Michalski, Softcover reprint of the hardcover 1st edition All rights reserved. First published in 2014 by PALGRAVE MACMILLAN in the United States a division of St. Martin s Press LLC, 175 Fifth Avenue, New York, NY Where this book is distributed in the UK, Europe, and the rest of the world, this is by Palgrave Macmillan, a division of Macmillan Publishers Limited, registered in England, company number , of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave and Macmillan are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN ISBN (ebook) DOI / Library of Congress Cataloging-in-Publication Data Michalski, Grzegorz, 1972 Value-based working capital management : determining liquid asset levels in entrepreneurial environments/grzegorz Michalski. pages cm Includes bibliographical references and 1. Working capital. 2. Cash management. I. Title. HG4028.W65M '2 dc A catalogue record of the book is available from the British Library. Design by Amnet. First edition: April

5 This book is dedicated to My wife Anna, son Samuel, daughter Eunika, and son Mateusz

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7 Contents List of Figures List of Tables List of Equations Acknowledgments ix xiii xvii xxi Introduction 1 1 Working Capital Management in the Business Context 7 2 Understanding and Measuring Financial Liquidity Levels 33 3 Intrinsic and External Values of Liquidity and Optimization 77 4 Net Working Capital Management Strategies 127 Conclusion 151 Bibliography 155 Index 179

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9 List of Figures 1.1 Relation between raw-materials level and its influence on value creation in case of smaller-than-average sensitivity to risk in terms of a shortage of raw materials Relation between raw-materials level and its influence on value creation in case of average sensitivity to risk in terms of a shortage of raw materials Relation between raw-materials level and its influence on value creation in case of a higher-than-average sensitivity to risk in terms of a shortage of raw materials Relationship between raw-materials levels, business sensitivity to risk in terms of a shortage of ready-to-sell finished goods, and the level of cash revenues related to demand for firms products or services The relationship between the marginal cost of capital rate and the level of capital tied into investments resulting from holding raw-materials inventories The relationship between the marginal cost of capital rate and the risk of a lack of raw-materials inventories The relationship between the marginal cost of capital rate and the level of raw-material inventories in various sensitivities to risk in terms of a lack of raw-materials inventories cases The relationship between the level of inventories and the level of total assets in Czech, Polish, and Slovak firms in the periods before, during, and after a crisis 23

10 x List of Figures 1.9 The relationship between the level of accounts receivables and the level of total assets in Czech, Polish, and Slovak firms in the periods before, during, and after a crisis The relationship between the level of cash and the level of total assets in Czech, Polish, and Slovak firms in the periods before, during, and after a crisis Central European current ratio (WBP) levels before ( ), during ( ), and after ( ) the crisis in a business environment with continuous growing risk sensitivity Central European quick liquidity ratio (WPP) levels before ( ), during ( ), and after ( ) the crisis in a business environment with continuous growing risk sensitivity Central European cash indicator ratio (WSP) levels before ( ), during ( ), and after ( ) the crisis in a business environment with continuous growing risk sensitivity Net liquid balances (NLB) levels before ( ), during ( ), and after ( ) the crisis in a business environment with continuous growing risk sensitivity L nt levels before ( ), during ( ), and after ( ) the crisis in a business environment with continuous growing risk sensitivity The current liquidity index (CLI MZ ) in manufacturing firms before ( ), during ( ), and after ( ) the crisis The Lambda index of enterprise liquidity (λ) in manufacturing firms before ( ), during ( ), and after ( ) the crisis The cash to total assets (CSH/TA) in manufacturing firms before ( ), during ( ), and after ( ) the crisis The cash to annual revenues (CSH/CR) in manufacturing firms before ( ), during ( ), and after ( ) the crisis 99

11 List of Figures xi 3.3 Target level of liquidity based on the risk sensitivity of the company The operating cycle (OC) lengths in manufacturing firms before ( ), during ( ), and after ( ) the crisis Cash conversion cycle (C) lengths in manufacturing firms before ( ), during ( ), and after ( ) the crisis Individual risk sensitivity of an enterprise (ISRE, ϣ) as a function of the operating cash inflows volatility (σocfi) Individual risk sensitivity of an enterprise (ISRE, ϣ) as a function of the level of total assets real value (TA) Individual risk sensitivity of an enterprise (ISRE, ϣ) as a function of the innovativeness of the enterprise product and the enterprise product market (OIEP) Individual risk sensitivity of an enterprise (ISRE, ϣ) as a function of the innovativeness of market absorption of the enterprise products (MAEP) Individual risk sensitivity of an enterprise (ISRE, ϣ) as a function of the enterprise size (SIZE) Individual risk sensitivity of an enterprise (ISRE, ϣ) as a function of the short-term financing policy (D S /D L ) Individual risk sensitivity of an enterprise (ISRE, ϣ) as a function of the short-term investment policy (CA/CR) The inventory period (INVP) lengths in manufacturing firms before ( ), during ( ), and after ( ) the crisis The accounts receivable period (DSO) lengths in manufacturing firms before ( ), during ( ), and after ( ) the crisis An integrated approach to the use of the cash-resourcesmanagement models depending on the quality of information possessed on inflows (CIF) and outflows (COF) of cash in businesses 148

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13 List of Tables 1.1 Value-influencing consequences of a raw-materials level that is too low changing FCF and Effects of use of raw materials in enterprise changing FCF and The relationship between inventories and total assets (INV/TA) in Czech, Polish, and Slovak manufacturing firms in the periods before, during, and after a crisis The relationship between accounts receivables and total assets (AR/TA) in Czech, Polish, and Slovak manufacturing firms in the periods before, during, and after a crisis The relationship between cash and total assets (CSH/TA) in Czech, Polish, and Slovak manufacturing firms in the periods before, during, and after the crisis Central European current ratio (WBP) levels before ( ), during ( ), and after ( ) the crisis in a business environment with continuous growing risk sensitivity Central European quick liquidity ratio (WPP) levels before ( ), during ( ), and after ( ) the crisis in a business environment with continuous growing risk sensitivity Central European cash indicator ratio (WSP) levels before ( ), during ( ), and after ( ) the crisis in a business environment with continuous growing risk sensitivity Net liquid balances (NLB) levels before ( ), during ( ), and after ( ) the crisis in a business environment with continuous growing risk sensitivity 63

14 xiv List of Tables 2.5 Synthetic liquidity ratio (L nt ) levels before ( ), during ( ), and after ( ) the crisis in a business environment with continuous growing risk sensitivity Current liquidity index (CLI MZ ) levels before ( ), during ( ), and after ( ) the crisis in a business environment with continuous growing risk sensitivity in manufacturing enterprises Lambda index of enterprise liquidity (λ) levels before ( ), during ( ), and after ( ) the crisis in a business environment with continuous growing risk sensitivity Levels of Lambda index of enterprise liquidity (λ) and forecasts of difficulties assigned to them Cash to total assets (CSH/TA) levels before ( ), during ( ), and after ( ) the crisis in a business environment with continuous growing risk sensitivity Cash to annual revenues (CSH/CR) levels before ( ), during ( ), and after ( ) the crisis in a business environment with continuous growing risk sensitivity Operating cycle (OC) lengths before ( ), during ( ), and after ( ) the crisis in a business environment with continuous growing risk sensitivity Cash-conversion cycle (C) lengths before ( ), during ( ), and after ( ) the crisis in a business environment with continuous growing risk sensitivity The influence of working capital financing strategy choices and working capital investing strategy choices on key value creating indicators Inventory period (INVP) lengths before ( ), during ( ), and after ( ) the crisis in a business environment with continuous growing risk sensitivity 134

15 List of Tables xv 4.2 The accounts receivables period (DSO) before ( ), during ( ), and after ( ) the crisis in a business environment with continuous growing risk sensitivity 146

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17 List of Equations 1.1 = + = + FCF1 V VRM VNRM FCF0 ( RM ) + FCF + FCF 0( NRM ).. ( RM ) ( RM ) 1.. ( NRM ) ( NRM ) 1.2 = + = + FCF1 V VSTC VNTC FCF0 ( STC) + FCF NTC + FCF.. ( STC) ( STC) 1.. ( NTC) 0( ) ( NTC) 9 25 CA 2.1 WBP = Current Ratio = 48 CL CA INV 2.2 WPP = Quick Liquidity Ratio = CL CSH 2.3 WSP = Cash indicator = 56 CL CSH + STFS STOS 2.4 NLB = TA 2.5 L nt = CA CL CA CL + STD STI

18 xviii List of Equations 2.6 CLI MZ CSH = NP ( t 1) + OCF + CMD ( t 1) ( t 1) t 67 ILR TCFt 2.7 l = TCFaR t NWC = CA CL C = DSO+ INVP APP = + FCF1.. V FCF0 = ( NWC0) ( + TC ( 1 T + CR c)) ( 1 Tc) 3.4 ϣ = f (CA/CR, D S /D L, SIZE, MAEP, TA, σocfi, OIEP, ENV, PEBB) = f (k rf, ERP, ϣ, β, k dl, k ds ) P K 4.1 EOQ = K hid sup 05, 131 P 4.2 TCI Q K Q = sup + LINVL v C 2 2 TAXS Ksup P 4.3 VBEOQ = v ( + C TAXS) INV 05, 4.4 LINVL SD ln C Q SD v 2 INV = 2 P K loi inv p, 135 FCF 4.5 Kloi = VNINV = FCF NINV + 1 0( ).. ( NINV ) ( NINV ) 135

19 List of Equations xix 4.6 POQ = C inv 2 Ksup P P v 1 m 05,, P < m, 136 Q P 4.7 TCI m v C P = 1 Q K inv sup Q P 4.8 INV = m + LINVL TAXS Ksup P 4.9 VBPOQ = P v CINV TAXS m + 1 ( ) 05,, P < m FCF t = [(CR t - FCE t - VCE t - NCE t ) TAXS] + NCE t - NWC t - CAPEX t NWC t = AR t + INV t + CSH t - AP t, 139 FCF 4.12 V = FCF TAXS EBIT 4.13 V = AR + = AR + NOPAT NOPAT1.. = TAXS [( CRa CR b ) ) (1 C ) C AR BDL PCL] vc ar 143 CRb 4.15 AR = ( DSOa DSOb) + Cvc DSO 360 CR CR a CRb, if CRa > CR b 360 CR CR 360 CRa AR = ( DSOa DSOb) + Cvc DSO CRa CRb, if CRa > CR b 360 a b 143

20 xx List of Equations 2 G SD 4.16 C = LCL = SD ln 2 P K ioc 05 2p, 149 FCF 4.17 Kioc = VNCSH = FCF NCSH + 1 0( ).. ( NCSH ) ( NCSH ) 150

21 Acknowledgments I want to thank all those who reviewed the book and made their constructive and helpful observations and comments, in particular: Professor Lumír Kulhánek, Professor Vladimír Gazda, Professor Marta Orviská, Professor Petr Polak, and Professor Marek Panfil. Additionally, I want to thank anonymous reviewers of this book for their remarks. Many other people had a significant influence on the author, and as result, made helpful contributions to this book. Among them I wish to mention: Professor John T. Zietlow, Professor Wiesław Pluta, Professor Adam Kopiński, and Professor Krzysztof Jajuga. Without their guidance and practical advice, this book could not have been written. I also want to thank Doctor Lucas Harriman and Thomas Kever for their time and work.