Cash flow management and manufacturing firm financial performance: A longitudinal perspective

Abstract

A firm's cash flow policies, which manage working capital in the form of cash receivables from customers, inventory holdings, and cash payments to suppliers, are inexorably linked to the firm's operations. Building on earlier research, this study: (i) extends prior studies by examining the relationships between changes in cash flow measures and changes in firm financial performance using a longitudinal sample of firm data; and (ii) investigates the direction of the relationship between quarterly changes in cash flow positions and firm financial performance. This study is conducted using the Generalized Estimating Equations (GEE) methodology to analyze a longitudinal sample of eight quarters of cash flow and financial performance data from 1,233 manufacturing firms. The analyses find that changes in the widely used Cash Conversion Cycle (CCC) metric do not relate to changes in firm performance; however, changes in the less used Operating Cash Cycle (OCC) metric are found to be significantly associated with changes in Tobin's q. This examination of how changes in specific cash flow measures relate to changes in Tobin's q shows that both reductions in Accounts Receivables (measured as Days of Sales Outstanding [DSO]) and reductions in Inventory (measured as Days of Inventory Outstanding [DIO]) relate to firm financial performance improvements that persist for several quarters. Endogeneity tests of whether a firm's cash flow management strategy leads to changes in firm performance or if the cash flow strategy is a byproduct of firm performance suggest that reductions in DSO lead to improved firm financial performance.

Profitability and Financial Sustainability Analysis in Italian Aquaculture Firms by Application of Economic and Financial Margins

“…This can be seen from several studies relating to companies with large investments in fixed assets (Fazzari and Petersen, 1993;Cleary, 1999;De Miguel and Pindado, 2001;Bagella et al, 2001;Caggese and Cunat, 2014) and working capital (Shin and Soenen, 1998;Howorth and Westhead, 2003;Padachi, 2006;Caggese, 2007;Taylor, 2011;Ukaegbu, 2014;Kroes and Manikas, 2014;Iotti and Bonazzi, 2014c). In this research, we apply the approach of annual account analysis developed for the agri-food sector with capitalintensive characteristics (Bonazzi et al, 2012).…”

“…For the majority of companies (Dechow et al, 1998;Kroes and Manikas, 2014), the cycle of payments and receipts as a result of working capital, known as the operating cash cycle, is shorter than the cycle since the exit of money for investment and its return, called the investment cycle. In Equation (3), given a generic period (t), WC aT is working capital total assets and WC sT is working capital total sources.…”

Trends in working capital management and its impact on firms’ performance – An analysis of SMEs

“…The QRATIO is defined by [22], is the ratio of market value of a firm's assets divided by the book value.…”

Are Inventories Accretive? Lessons from Inventory and Earnings Relationship in the U.S. Capital Goods Sector

“…Given the tremendous importance of inventory in firms' competitive and financial lives, a lively literature has emerged through the careful analysis of inventory management and financial performance (Fry and Steele 1995, Gaur, Fisher et al 2005, Capkun, Hameri et al 2009, Kesavan, Gaur et al 2010, Eroglu and Hofer 2011, Caglayan, Maioli et al 2012, Hofer, Eroglu et al 2012, Jones and Tuzel 2013, Kesavan and Mani 2013, Kroes and Manikas 2014. Despite the varied nature of the results found over time, a relatively robust consensus seems to be emerging that prudent inventory management does indeed contribute to better financial performance (Gaur, Fisher et al 2005, Modi and Mishra 2011, Hourmes, Dickins et al 2012, Jones and Tuzel 2013, Kesavan and Mani 2013, Wang, Yiu et al 2013, Alan, Gao et al 2014, Basu and Nair 2014, Kroes and Manikas 2014.…”

“…Despite the varied nature of the results found over time, a relatively robust consensus seems to be emerging that prudent inventory management does indeed contribute to better financial performance (Gaur, Fisher et al 2005, Modi and Mishra 2011, Hourmes, Dickins et al 2012, Jones and Tuzel 2013, Kesavan and Mani 2013, Wang, Yiu et al 2013, Alan, Gao et al 2014, Basu and Nair 2014, Kroes and Manikas 2014.…”