Negative working capital management: an up-to-the-limit application of the concept of supply chain management in corporate finance

Na Liu, Dongmei Wang

Abstract


Working capital is the most liquid and dynamic component of total assets. Working capital management, as the core content of short-term corporate finance, is vital to enterprises’ survival and development. It also plays an important role in maximizing the shareholders’ wealth. In this paper, we test the differences in profitability and risk levels from 2002 to 2006 between Chinese listed companies, which pursue positive and negative working capital policies with the method of one-way ANOVA. Furthermore, the first sample is eventually subdivided according to net commercial credits into two sub-ones, namely positive and negative commercial credits. The same analyses are done on the above two sub-samples again. To find out how and what factors influence enterprises’ profitability through different working capital polices, we conducted linear regression analyses. The results show the proportion of Chinese listed companies which adopt the policy of negative working capital is steadily rising year by year, and they have gained greater improvement in performance. However, relatively higher risk cannot be ignored. Companies can improve their performance by increasing the ratio of current assets to total assets (CAAR), the ratio of net cash inflows from operating activities to current liabilities (COACL), the growth rate of total assets (GRA), the size of total assets (LNAT), shortening days of working capital (DWC) and reducing the ratio of current liabilities to total assets (CLAR). In this paper, net commercial credits are firstly introduced into working capital research, and particular attention is paid to risk and profitability indicators. Such a practice is a meaningful endeavour in this type of study. The conclusion of this paper not only supports the concept of "negative working capital" and its technical application, but also gives useful suggestions to listed companies both in China and in other countries.


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DOI: http://dx.doi.org/10.7434/mser.v1i1.16213

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