Working Capital Management

The management of working capital is essential for the company to remain liquid enough to meet its short term creditors. But can proper working capital management make a company more profitable than a competitor who does not manage its working capital? What are the different metrics and processes that need to be improved to increase profitability through working capital management? This thesis is restricted to the different processes around working capital management and will concentrate on a few different metrics to find out how companies can perform better by managing working capital. The method used will be a quantitative study of how working capital management affects profitability in Finnish and Swedish publically traded companies. Industry

A study between Finnish and Swedish companies’ working capital management is interesting, because Sweden has a longer history in industrialization than Finland (Blomström & Kokko, 2006). Otherwise, the economic and political situation is very much alike, thus contributing to a good research environment. The purpose of this thesis is also to find out which working capital metrics and drivers affect profitability the most, and in which industries working capital management effects profitability the most. Publically traded companies have been chosen as the sample, as these companies have shareholder pressure on optimizing their operations in order to maximize shareholder value.

An overview of working capital and terminology around it is presented importance of working capital. Some key metrics and definitions are defined in this chapter, which are crucial for the research section of the report. The purpose of this chapter is to introduce key principles around working capital and general theory around it. Because of the nature of this thesis, an introduction to Fisher’s separation theorem is given. This chapter will then introduce vocabulary and drivers behind working capital, and how the proper management of working capital can improve liquidity and profitability in a

Depending on the industry the company is active in, the inventories may consist of different things; e.g. raw materials, works in progress or finished goods. Managing and optimizing inventory levels are tedious tasks which require balancing between sales and tied-up capital. In case the inventory levels are too low, the company might miss out on sales when demand arises or might not be able to deliver goods on time. On the other hand, too much inventory ties up capital that can be used elsewhere more effectively. The trend has been to lower inventory levels over the past decades (Brealey;Myers;& Allen, 2006 pp 821). For example, 30 years ago U.S companies had approximately 12% of total assets tied up in inventory, whereas today the percentage is around six (Brealey;Myers;& Allen, 2006 pp 821). A concept that is often used for inventory management is just-in-time approach. The just-in-time means that inventories are kept to a bare minimum and optimizing the supply chain processes to serve so that the inventories never