Working capital management and industry characteristics: A comparison of two Finnish industries
Mäntylä, Markus (2016-11-16)
Working capital management and industry characteristics: A comparison of two Finnish industries
Mäntylä, Markus
(16.11.2016)
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Turun yliopisto. Turun kauppakorkeakoulu
Kuvaus
siirretty Doriasta
Tiivistelmä
Previous research has found that working capital management has an impact on corporate profitability. On the other hand, previous studies have also found that there are significant differences in working capital management between industries and that many companies do not have comprehensive policies for managing their working capital. This study analyzes working capital management in two Finnish industries: in the electronic equipment and food production industries. Typical industry characteristics are taken into account in the analysis, and it is discussed how they are connected to working capital management.
Through financial ratio analysis, distinct differences between the industries were found. According to the average cash conversion cycles, working capital management is seemingly more efficient in the food production industry. Another major finding was that there is more similarity in working capital management among the food production companies than among the electronic equipment companies. This finding was made by comparing the standard deviations of the relevant financial ratios between the industries. Explanations for these findings were identified by taking the industry characteristics, such as typical business practices in the industries into account. For example, one factor contributing to working capital management within an industry seems to be the fierceness of competition among the companies.
In practice, the results of this study are interesting for the managers, shareholders, and other stakeholders of the companies operating in the analyzed industries. In order to obtain information about the performance of a company’s working capital management, relevant financial ratios can be compared to the average financial ratios in the industry. Although it is challenging to recognize optimal working capital management practices due to the complexity of the phenomenon, the observations made in this study could help in developing these practices.
Through financial ratio analysis, distinct differences between the industries were found. According to the average cash conversion cycles, working capital management is seemingly more efficient in the food production industry. Another major finding was that there is more similarity in working capital management among the food production companies than among the electronic equipment companies. This finding was made by comparing the standard deviations of the relevant financial ratios between the industries. Explanations for these findings were identified by taking the industry characteristics, such as typical business practices in the industries into account. For example, one factor contributing to working capital management within an industry seems to be the fierceness of competition among the companies.
In practice, the results of this study are interesting for the managers, shareholders, and other stakeholders of the companies operating in the analyzed industries. In order to obtain information about the performance of a company’s working capital management, relevant financial ratios can be compared to the average financial ratios in the industry. Although it is challenging to recognize optimal working capital management practices due to the complexity of the phenomenon, the observations made in this study could help in developing these practices.