Uncovering Cash and Insights from Working Capital
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“The Relationship Between Cash Conversion Cycle and Financial Characteristics of Industrial Sectors: an Empirical Study”
“The relationship between cash conversion cycle and financial characteristics of industrial sectors: an empirical study” AUTHORS Faris Nasif Al-Shubiri Nassem Mohammad Aburumman Faris Nasif Al-Shubiri and Nassem Mohammad Aburumman (2013). The ARTICLE INFO relationship between cash conversion cycle and financial characteristics of industrial sectors: an empirical study. Investment Management and Financial Innovations, 10(4) RELEASED ON Monday, 09 December 2013 JOURNAL "Investment Management and Financial Innovations" FOUNDER LLC “Consulting Publishing Company “Business Perspectives” NUMBER OF REFERENCES NUMBER OF FIGURES NUMBER OF TABLES 0 0 0 © The author(s) 2021. This publication is an open access article. businessperspectives.org Investment Management and Financial Innovations, Volume 10, Issue 4, 2013 Faris Nasif Al-Shubiri (Jordan), Nassem Mohammad Aburumman (Jordan) The relationship between cash conversion cycle and financial characteristics of industrial sectors: an empirical study Abstract This study aims to investigate the relationship between cash conversion cycle and financial characteristics. A sample of Jordanian different industrial sector of 11 was selected covering the period 2005-2011 listed on the Amman Stock Exchange (ASE). Cash conversion cycle is an important measure for companies in measuring the operating cycle where the work cycle of raw materials for the purposes of manufacturing and production that ends the existence of a good or service offers customers ready. Hence, the flow of financial resources in firms is very important supply chain and presents the center of attention. The results of this study indicate there is statistically significant and positive relationship between cash conversion cycle and independent variables, such as: debt, market, productivity, liquidity and dividends indicator at different significant level 1% and 5%, and the size indicator is weak relationship with significant level at 10% and there is no significant relationship with profitability indicator and cash conversion cycle. -
Working-Capital Financing of Small Business
WORKING,-CAPITAL FINANCING OF SMALL BUSINESS VICTOR L. AlDREWS, *" SEYMOUR FRIEDLANDt AND ELI SHAPIRO$ INTRODUCTION There are several important suppliers of short-term funds1 in our financial system. The means used by small concerns to secure short-term financing are associated closely enough with the institutional practice of these lenders that, in large part, the two must be considered together. Therefore, this discussion concentrates upon the financial relationships between small businesses and (I) the commercial banking system, (2) other financial intermediaries, (3) business firms in their lending activities, and (4) specialized financing institutions. THE DEMAND FOR SHiORT-TERM FUNDS There are strong incentives for business to finance short-term assets with short- term funds and permanent assets with long-term funds.2 Lack of access to external long-term debt and equity sources, however, compels small businesses to substitute short-term funds where long-term funds would be preferred. Thus, many small firms 3 are forced to finance permanent assets by continuously refunding short-term debt. * A.B. i95i, M.A. 1953, M.B.A. 1954, University of Chicago; Ph.D. 1958, Massachusetts Institute of Technology. Assistant Professor of Finance, School of Industrial Management, Massachusetts Institute of Technology. Contributor to economics publications. tB.S. I95O, M.B.A. 1951, Boston University; Ph.D. 1955, Harvard University. Assistant Professor of Finance, School of Business, Rutgers University. Contributor to economics publications. $A.B. 1936, Brooklyn College; A.M. 1937, Ph.D. 1945, Columbia University. Professor of Finance, School of Industrial Management, Massachusetts Institute of Technology. Research Staff, National Bureau of Economic Research. -
Working Capital Considerations in Middle Market M&A
Working Capital Considerations in Middle Market M&A Table of Contents I. M&A PROCESS OVERVIEW...........................................................3 II. WORKING CAPITAL CALCULATIONS............................................6 III. EXAMPLES....................................................................................9 IV. WORKING CAPITAL NEGOTIATIONS..........................................10 V. TRUE-UP PROCESS AND DISPUTES...........................................11 VI. RECOMMENDED TIPS.................................................................13 VII. ABBREVIATIONS AND DEFINED TERMS....................................14 VIII. CONTACT US...............................................................................15 WORKING CAPITAL CONSIDERATIONS IN MIDDLE MARKET M&A | 2 I. M&A Process Overview From start to finish, middle market M&A transactions can take anywhere from a few months to over a year to get to closing. Events and steps that typically occur along the way are depicted in the timeline below. Buy-Side Indication Due Confirmatory of Interest Diligence Due Diligence Closing Sell-Side CIM, Letter of Definitive Post- Due Management Intent Agreement Closing Diligence Presentations The M&A process above is a generalized depiction for illustrative purposes. It is not all- inclusive, and the actual timeline of events depends on a variety of factors, including how and by whom the sell-side process is being run. SELL-SIDE DUE DILIGENCE: While certainly not a requirement, many sellers go through a sell-side or anticipatory due diligence process. This may focus heavily on financial due diligence, and in particular a Quality of Earnings, or QoE, analysis. Investing in a sell-side due diligence analysis offers the Seller a number of returns, including but not limited to: (i) identifying and mitigating material issues without buyer involvement; (ii) avoiding unexpected adjustments to reported earnings that sometimes upend transactions in the late innings; and (iii) gaining a firm grasp on working capital considerations. -
The Effects of Working Capital Management on Organizational Performance - a Survey of Manufacturing Firms in Eldoret Municipality
Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.5, No.5, 2014 The Effects of Working Capital Management on Organizational Performance - A Survey of Manufacturing Firms in Eldoret Municipality Daniel Kamau 1* , Amos Ayuo 2 1. School of Human Resource Development, Jomo Kenyatta University of Agriculture and Technology, Kenya. 2. Faculty of Commerce, Egerton University, Kenya. * E-mail of the corresponding author: [email protected] Abstract Working capital management is a crucial element in determining the financial performance of an organization. The purpose of this study was to investigate the relationship between working capital management (given by cash conversion cycle, CCC) and organizational performance (represented by profitability/returns) of manufacturing firms in Eldoret Municipality of Uasin Gishu County, Kenya. A sample of 13 manufacturing firms in the region was used in the study. Historical data on financial performance was collected from the annual financial statements of the sampled firms for a period spanning ten years. More data was also obtained from the managements of these firms through interview schedules and questionnaires. Performance was measured in terms of return on assets and return on equity while cash conversion cycle, current assets to total assets and current liabilities to total assets were used as measures of working capital management. Correlation and regression analysis were used for the analysis. The findings reveal that the working capital management is negatively correlated with return on assets (ROA) and return on equity (ROE) consisting the R values of -0.148 and -0.231 respectively. However, these figures are low, implying that there is no significant relationship between CCC and performance measures used in the study. -
Smart Financing: the Value of Venture Debt Explained
TRINITY CAPITAL INVESTMENT SMART FINANCING: THE VALUE OF VENTURE DEBT EXPLAINED Alex Erhart, David Erhart and Vibhor Garg ABSTRACT This paper conveys the value of venture debt to startup companies and their venture capital investors. Venture debt is shown to be a smart financing option that complements venture capital and provides significant value to both common and preferred shareholders in a startup company. The paper utilizes mathematical models based on industry benchmarks for the cash burn J-curve and milestone-based valuation to illustrate the financing needs of a startup company and the impact of equity dilution. The value of venture debt is further explained in three primary examples that demonstrate the ideal situations and timing for debt financing. The paper concludes with two examples that quantify the value of venture debt by calculating the percentage of ownership saved for both entrepreneurs and investors by combining venture debt with venture capital. INTRODUCTION TO VENTURE DEBT Venture debt, also known as venture 2. Accounts receivable financing Venture debt is a subset of the venture lending or venture leasing, is a allows revenue-generating startup capital industry and is utilized worldwide.[2] type of debt financing provided to companies to borrow against It is generally accepted that for every venture capital-backed companies. their accounts receivable items four to seven venture equity dollars Unlike traditional bank lending, venture (typically 80-85%). invested in a company, one dollar is (or debt is available to startup companies could be) financed in venture debt.[3, 4] without positive cash flow or significant 3. Equipment financing is typically Therefore, a startup company should be assets to use as collateral.[1] There are structured as a lease and is used able to access roughly 14%-25% of their three primary types of venture debt: for the purchase of equipment invested capital in venture debt. -
Anatomy of an Asset Purchase Agreement
Buyer and Seller Beware: Navigating Business Purchase Agreements Nicholas J. Bakatsias Michael J. Allen Carruthers & Roth, P.A. 336-379-8651 [email protected] [email protected] 1 Anatomy of an Asset Purchase Agreement TABLE OF CONTENTS I. Article I – Definitions II. Article II – Basic Transaction A. Sale and Purchase of Assets B. Excluded Assets C. Assumption of Liabilities III. Purchase Price and Payment A. Purchase Price Amount/Form B. Net Working Capital Adjustments C. Contingent Purchase Price D. Purchase Price Allocation E. Escrow 2 1 Anatomy of an Asset Purchase Agreement IV. Closing Deliveries; Closing Conditions A. Deliveries by Sellers B. Deliveries by Buyer V. Representations and Warranties of Seller A. Consents; No Conflicts B. Organization; Qualification and Authority C. Financial Statements D. Absence of Undisclosed Liabilities E. Absence of Certain Changes or Events F. Title to Assets; Condition of Assets G. Accounts Receivable H. Tax Matters I. List of Properties and Contracts J. Real Property K. Legal Compliance L. Permits 3 Anatomy of an Asset Purchase Agreement V. Representations and Warranties (cont.) M. Labor Matters N. Insurance O. ERISA and Company Benefit Plans P. Litigation Q. Compliance with Laws R. Transactions with Certain Persons S. Inventory 4 2 Anatomy of an Asset Purchase Agreement VI. Representations and Warranties of Buyer VII. Pre-Closing and Post Closing Obligations VIII. Indemnification A. Survival of Representations and Warranties B. Indemnification by Seller and Shareholders C. Indemnification by Buyer D. Limitations on Indemnification E. Indemnification Claims Process 5 Anatomy of an Asset Purchase Agreement IX. Ancillary Agreements A. Restrictive Covenants B. Confidentiality C. -
Cash Conversion Cycle
Session # 205 5/18/17 from 2:00-3:15 Cash Conversion 250 Commercial Street, STE 3012 Manchester, NH 03101 Cycle (603)573‐9206 Breathing Life into a Stale Dying Process Background FASB describes liquidity as reflecting “an asset’s or liability’s nearness to cash” (Statement of Financial Accounting Concepts No. 5, Recognition and Measurement in Financial Statements of Business Enterprises; PP 24, Footnote13). In accounting and auditing textbooks, the current and quick ratios continue to be the focus of liquidity analysis. Noticeably absent from most accounting and auditing textbooks is an approach to liquidity analysis that incorporates the element of time—the cash conversion cycle (CCC), was introduced in 1980 by Verlyn Richards and Eugene Laughlin in their article “A Cash Conversion Cycle Approach to Liquidity Analysis,” Financial Management, Vol. 9, No.1 (Spring 1980). Consideration of the CCC along with the traditional measures of liquidity should lead to a more thorough analysis of a company’s liquidity position. Static measures of liquidity, such as the current ratio, do not account for the amount of time involved in converting current assets to cash or the amount of time involved in paying current liabilities and…can be easily manipulated. Methodology Let’s discuss the elephant in the room… Static Measures of Liquidity An illustration of Static Measures Company A has $1,000,000 in current assets and $750,000 in current liabilities. The current ratio reveals that the Company A can cover its current liabilities with its current assets 1.33 times [$1,000,000 ÷ $750,000]. If Company A wished to maintain a higher current ratio or if a creditor’s loan covenant requires a higher current ratio, Company A could pay $500,000 of its current liabilities. -
Working Capital Capline Program
SBA CAPLine Program Options April 9, 2019 @ 11 a.m. Eastern To listen by phone, dial 1-877-369-5243 then enter access code: 0879391## For technical assistance, contact the AT&T Helpdesk at 888-796-6118 SBA CAPLine Program Options 7A LOAN GUARANTY PROGRAM Flexible financing for your small business customers DE, KY, TN, WV - District Offices April 9, 2019 Presenter – Bill Reed 2 Topics for Today’s Discussion Which CAPLine is the Best Fit? 1. WC CAPLine 2. Seasonal CAPLine 3. Contract CAPLine 4. Builders CAPLine 3 Which CAPLine is the Best Fit? Use of Proceeds Working Capital CAPLine . Finance short term working capital/operating needs. Seasonal CAPLine . Finance the seasonal increases of A/R and Inventory. Contract CAPLine . Finance the costs of one or more specific contracts. Builders CAPLine . Finance direct expenses for construction and/or substantial renovation costs for building a home for future sale. 4 Which CAPLine is the Best Fit? Maturity . Maximum maturity on the Working Capital, Seasonal, and Contract CAPLines is 10 years while the Maximum maturity on the Builders CAPLine is 5 years. CAPLines can be renewed any time during the maximum term period. CAPLines with an original maturity of 12 months or less will need to pay an additional guaranty fee within 30 days of renewal. 5 Which CAPLine is the Best Fit? Collateral ▶Existing (on the B/S now) or Creation of assets . WC CAPLine is secured with eligible trading assets and may be secured with additional assets found on the business & personal B/S. Seasonal, Contract, and Builders CAPLines are secured with the assets associated with the creation of what will be. -
Working Capital Adjustments in M&A Transactions
Working Capital Adjustments in M&A Transactions Navigating a Minefield Brian B. Gilbert G&R Review M&A transactions typically include a true-up for working capital as a component of the economic consideration. Buyers want to insure that they are acquiring a business on a going-concern basis that will be stocked with sufficient working capital to meet the immediate needs of the business, including obligations to customers and trade creditors. Sellers want to be compensated for earnings and profits they generate and for assets of the business that their efforts created. These seemingly simple and straightforward desires can lead to complicated provisions that can end up in dispute in the implementation if not carefully drafted. This article will explore the various issues in drafting working capital adjustment provisions and potential problem areas. Part – 1 - Components of Working Capital and Valuation Principles Under Generally Accepted Accounting Principles ("GAAP"), the concept of "working capital" is simply the sum of current assets over current liabilities. However, in the context of M&A transactions, rarely is working capital defined in such a simplistic manner. Current asset components include cash, inventory, accounts receivable, and prepaid items. Current liabilities include accounts payable and accrued expenses. We will explore each of these items below. Cash Many deals are priced on a cash free/debt free basis. As such cash and cash equivalents are normally not included in the calculation of working capital. Nevertheless, depending on the nature of the business, Buyers may want to ensure that they will have enough operating cash on hand as of closing. -
It's Worth Being Picky
WORKING CAPITAL ADJUSTMENTS example, six or 12 months). Alternatively they may use a pre-signing balance-sheet It’s worth date as a reference. The calculation of target working capital will depend on the historical and projected growth of the business. The parties will also consider seasonality or other being picky industry trends that affect working capital. For example, if the business is seasonal, a Complex but important, working capital adjustments can particular month could be a high or low point in the business’ cycle. It may be more trip up even the most amicable deal. Here are some tips appropriate to use an average than to choose a particular month as the target working ost private acquisitions start adverse change or change in customer capital amount. Conversely, the trailing with at least one happy relations. Thus, the incentive and working-capital average may not be the best event – seller and purchaser opportunity for mischief is great. measure for a business that has grown over agree on a price. That event As the draftsperson of the acquisition the recent financial period. The working Mquickly leads to a new negotiation, as they agreement for the transaction, it is capital needed to operate the business at realise that the balance sheet of the business imperative that the lawyer coordinates early closing will be greater than the historical is going to change between signing and and often with the client and its accountant trailing average, and the price the buyer pays closing. Income will be earned (or lost), regarding the working capital adjustment. -
Working Capital Adjustments in Commodities M&A Transactions
Working Capital Adjustments in Commodities M&A Transactions By John Secor and Ajit George Working capital is a well-understood reality to business owners – it is the funds required to manage a company’s day-to-day operations. It reflects the balance of collections from customer payments and the disbursements made to suppliers. However, the calculation and treatment of working capital is often complex and heavily negotiated in a sale transaction. Buyers want to ensure the acquired business is able to continue meeting short-term operating requirements post-closing, as they would need to pro- vide additional capital if a seller failed to do so. Sellers, on the other hand, want to be adequately compensated for business that they have already performed and are cau- tious about handing over more working capital than necessary at closing. 18 Brown Brothers Harriman | COMMODITY MARKETS UPDATE Acquisition agreements typically include working capital adjust- As noted, the adjustment mechanism is particularly important ments in order to protect against potential adverse shifts in for commodities firms because their balance sheets are primar- value and ensure the new business has the appropriate level of ily composed of inventory that is exposed to commodity price working capital. These adjustments are particularly relevant for volatility, and these fluctuations are often funded with short-term commodities businesses given that they hold significant inven- revolving credit facilities. The working capital levels at any point tory that is subject to price volatility and largely financed by in time may reflect transient variations due to changes in com- short-term secured debt. -
Cash Conversion Cycle: Which One and Does It Matter?
International Journal of Accounting and Financial Reporting ISSN 2162-3082 2019, Vol. 9, No. 4 Cash Conversion Cycle: Which One and Does It Matter? Xin Tan (Corresponding Author) Silberman College of Business, Fairleigh Dickinson University 1000 River Rd, Teaneck, NJ 07666, United States Tel: 201-692-7283 E-mail: [email protected] Sorin A. Tuluca Silberman College of Business, Fairleigh Dickinson University 285 Madison Avenue, Madison, NJ 07940, United States Received: September 28, 2019 Accepted: October 17, 2019 Published: October 24, 2019 doi:10.5296/ijafr.v9i4.15529 URL: https://doi.org/10.5296/ijafr.v9i4.15529 Abstract In the present study, we attempt to investigate the information validity of an important financial metric, the cash conversion cycle (CCC.) A survey of scholarly papers and textbooks reveals that multiple methods to compute the CCC components are employed. Based on a relatively large dataset for six public companies, we explore two of the different methods and their effect on the resulting CCC value. We find that the means of the time series of the two methods over 20 years have only mild statistically significant differences. However, there are important differences in several annual periods for some of the firms analyzed. Since financial managers and financial analysts use the CCC for decision-making, analysis and valuation purposes, the findings of this research represent a warning that the CCC computations might not yield reliable conclusions, as they are dependent on the input used in the calculations. Keywords: Cash conversion cycle, Information validity, Working capital management 1. Introduction Financial statements can help investors, supply chain partners, and other stakeholders of a company analyze its operating performance and financial health.