DOCSLIB.ORG

Cash Conversion Cycle Strategies to Avoid Business Failure

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Cash Conversion Cycle Strategies to Avoid Business Failure Walden University ScholarWorks Walden Dissertations and Doctoral Studies Walden Dissertations and Doctoral Studies Collection 2020 Cash Conversion Cycle Strategies to Avoid Business Failure Brian Savino Walden University Follow this and additional works at: https://scholarworks.waldenu.edu/dissertations Part of the Finance and Financial Management Commons This Dissertation is brought to you for free and open access by the Walden Dissertations and Doctoral Studies Collection at ScholarWorks. It has been accepted for inclusion in Walden Dissertations and Doctoral Studies by an authorized administrator of ScholarWorks. For more information, please contact [email protected]. Walden University College of Management and Technology This is to certify that the doctoral study by Brian J. Savino has been found to be complete and satisfactory in all respects, and that any and all revisions required by the review committee have been made. Review Committee Dr. Chad Sines, Committee Chairperson, Doctor of Business Administration Faculty Dr. Craig Martin, Committee Member, Doctor of Business Administration Faculty Dr. Judith Blando, University Reviewer, Doctor of Business Administration Faculty Chief Academic Officer and Provost Sue Subocz, Ph.D. Walden University 2020 Abstract Cash Conversion Cycle Strategies to Avoid Business Failure by Brian J. Savino MBA, Wright State University, 2010 BS, Wright State University, 2006 Doctoral Study Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Business Administration Walden University August 2020 Abstract At the end of 2018, the leading 2,000 U.S. and European companies had more than $2.5 trillion of cash unnecessarily tied up in working capital. The efficient management of working capital will lead to more cash invested in profitable projects leading to long term stability. This research will benefit chief financial officers (CFO) looking for strategies to manage working capital, which leads to higher profits and will help CFOs better manage economic downturns. Using the resource dependence theory as the conceptual framework, the purpose of this qualitative multiple case study was to explore cash conversion cycle (CCC) strategies used by business leaders to support the necessary cash flow to reduce the risk of business failure. The participants comprised 3 CFOs from the Tampa, Florida, metropolitan area who have developed strategies to manage cash. Data were collected via semistructured interviews and company documents. Thematic analysis was used to analyze the data. Four themes emerged: incentives to pay early, using industry standards published by the Risk Management Association for an optimal level of inventory, creditworthiness, and relationships. A key recommendation includes establishing customer financial wherewithal. The implications for positive social change include the potential to provide CFOs strategies to reduce the CCC, reduce the risk of business failure, and maintain employment stability, benefiting the community in which it is located. Cash Conversion Cycle Strategies to Avoid Business Failure by Brian J. Savino MBA, Wright State University, 2010 BS, Wright State University, 2006 Doctoral Study Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Business Administration Walden University August 2020 Dedication I dedicate this paper to my wife and parents. My wife has been one of my biggest supporters, always believing in me when I did not believe in myself. As for my parents, my mother always expressed how proud she was of me by saying, “you’re the best.” My father spent most of his career working long hours to support me financially through every adventure without second-guessing my decisions and always stated, “May all your dreams come true.” Table of Contents List of Tables ..................................................................................................................... iv Section 1: Foundation of the Study ......................................................................................1 Background of the Problem ...........................................................................................1 Problem Statement .........................................................................................................2 Purpose Statement ..........................................................................................................2 Nature of the Study ........................................................................................................3 Research Question .........................................................................................................4 Interview Questions .......................................................................................................4 Conceptual Framework ..................................................................................................4 Operational Definitions ..................................................................................................5 Assumptions, Limitations, and Delimitations ................................................................6 Assumptions ............................................................................................................ 6 Limitations .............................................................................................................. 6 Delimitations ........................................................................................................... 7 Significance of the Study ...............................................................................................7 Contribution to Business Practice ........................................................................... 7 Implications for Social Change ............................................................................... 8 A Review of the Professional and Academic Literature ................................................8 Literature Review Opening Narrative ..................................................................... 8 Resource Dependence Theory ................................................................................ 9 Rival Theories ..............................................................................................................15 i Game theory .......................................................................................................... 15 Agency theory ....................................................................................................... 15 Transaction cost theory ......................................................................................... 17 Working Capital .................................................................................................... 17 Current Assets and Current Liabilities .................................................................. 24 Cash Conversion Cycle ......................................................................................... 26 Profitability ........................................................................................................... 30 Transition .....................................................................................................................34 Section 2: The Project ........................................................................................................35 Purpose Statement ........................................................................................................35 Role of the Researcher .................................................................................................35 Participants ...................................................................................................................37 Research Method and Design ......................................................................................39 Research Method .................................................................................................. 39 Research Design.................................................................................................... 40 Population and Sampling .............................................................................................41 Ethical Research...........................................................................................................43 Data Collection Instruments ........................................................................................44 Data Collection Technique ..........................................................................................46 Data Organization Technique ......................................................................................49 Data Analysis ...............................................................................................................49 Reliability and Validity ................................................................................................51 ii Reliability .............................................................................................................. 51 Validity ................................................................................................................. 52 Transition and Summary ..............................................................................................54 Section 3: Application to Professional Practice and Implications for Change ..................55 Introduction ..................................................................................................................55
Load more

Recommended publications
  • Accounts Receivable Purchase Programs Offer Compelling Financing Advantages
    Accounts Receivable Purchase Programs Offer Compelling Financing Advantages By John Padwater Director, Financial Supply Chain Americas [email protected] Although the global financial crisis is behind us, corporations continue to seek new and more advantageous sources of liquidity. One strategic financing option that is gaining popularity is an accounts receivable (A/R) purchase program. In an A/R purchase program, a bank typically purchases a corporation's receivables as soon as the company delivers goods to its customer and issues an invoice. Advantages of such a program can include less expensive financing, favorable off- balance sheet treatment of receivables assets, and reduced credit risk related to the particular obligor. Many corporations are turning to A/R purchase programs because of the negative impact that recent regulatory and accounting changes have had on two other financing alternatives — asset-based lending (ABL) facilities and asset securitization programs. Regulatory and Accounting Drivers Basel III, the latest global regulatory standard for bank capital adequacy, can require financial institutions to hold more capital in support of ABL facilities and asset securitization programs than if they were providing financing through an A/R purchase program. This creates a pricing advantage for corporations selling their receivables. In an asset-based loan, a bank takes a security interest in the collateral. In contrast, with an A/R purchase program, the bank purchases the receivable on a true sale basis, often buying a 100% interest in it on a non-recourse or limited-recourse basis. This affords a particular advantage to non-investment grade companies that have substantial accounts receivable due from investment grade or highly rated counterparties.
    [Show full text]
  • “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.
    [Show full text]
  • Cash Receipts /Accounts Receivable
    Section 8 – Cash Receipts /Accounts Receivable Overview Most local governments collect revenue over the counter and through the mail from the general public in the form of cash, personal checks, credit and debit card transactions, or money orders. Many local governments are also offering online payment options and direct debit of customers’ bank accounts for repetitive payments such as monthly utility bill payments. Collections may take place at multiple locations throughout the government’s operations and be for a number of purposes including: Tax payments Utility payments Various fees and charges Court collections Permits and licenses Other service charges It is necessary to establish an adequate system of controls to assure that all amounts owed to the government are collected, documented, recorded, and deposited to the bank accounts of the government entity, and to detect and deter error and fraud. Suitable controls should be established at each location where payments are received as well as at the centralized collections point. Documentation for each transaction may be generated manually by the use of a pre-numbered receipt form or through the use of a cash register, computer, or other electronic device that will provide the customer with a validated receipt and detailed and/or summary information for the government to use for balancing, reconciliation and auditing purposes. At the end of the day, this documentation is typically reconciled to the total of the cash, checks, and other forms of payment received. Total daily receipts are either manually recorded to the accounting system, or uploaded automatically by way of an electronic interface between the cash receipting and the accounting systems.
    [Show full text]
  • Cash Forecasting: Challenges, Modelling, and Visualization April 8, 2019
    Cash Forecasting: Challenges, Modelling, and Visualization April 8, 2019 © 2019 Treasury Webinars . All Rights Reserved 1 About Treasury Webinars Treasury Webinars offers webinars designed to empower Treasury, Accounts Payable, and Accounts Receivable success at companies of all sizes, across all industries. We only do what we do best, webinars. © 2019 Treasury Webinars . All Rights Reserved 2 Learning Objectives • Separate cash forecasting myths from reality and define what a successful cash forecast looks like at your company. • Revise specific areas of your cash forecasting process to improve the quality of the short and long-term cash forecasts at your company. • Understand how forecasting done right improves strategic planning and delivers business agility for your company. © 2019 Treasury Webinars . All Rights Reserved 3 Our Agenda • Why Cash Forecasting Matters • Cash Forecasting Myths • Defining Your Cash Forecasting Process & Framework • Leveraging the Right Technology • Cash Forecasting Best Practices • Final Thoughts & Resources © 2019 Treasury Webinars . All Rights Reserved 4 Why Cash Forecasting Matters • Impacts borrowing and investment decisions • Impacts debt covenant compliance risk • Impacts working capital efficiency • Increase visibility into the sources and uses of cash along with the associated costs and benefits • Impacts financial agility • Impacts operational agility • Increased investor focus on cash balances and cash deployment efficiency © 2019 Treasury Webinars . All Rights Reserved 5 Why Cash Flow Forecasting Matters © 2019 Treasury Webinars . All Rights Reserved 6 Budget vs. Plan vs. Forecast •Budget- What you would like to happen •Plan- How you are going to make it happen •Forecast- What you think is going to happen © 2019 Treasury Webinars . All Rights Reserved 7 A Forecast is NOT a Target © 2019 Treasury Webinars .
    [Show full text]
  • Accounts Payable Reconciliation Statement
    Accounts Payable Reconciliation Statement Precarious and incorruptible Lou reacclimatize almost aborning, though Milt sparged his calorescence swive. Zorro is contractedlymastoid and orconfection yellow any consumedly toucanets whileunreconcilably. cavalier Levin clear and urbanizes. Humanlike Parker never popularise so How i reconcile accounts payable AccountingTools. Escalate issues to rotate Head of Financial Accounting where necessary. Every goal you identify which invoices are covered by a margin payment, jerk off the invoice and cross off on payment. The headings used in said agreement are included for convenience only and will only limit myself otherwise abide these Terms. And adjustment balancing amount. How to reconciliation statement reconciliations allow reconciliation ensures they do business case the payables. Take place on statement should tie to identify any unexplained differences in ap ledger systems guard against. Vlookup function can be flagged in payables account reconciliation, in any web report role of technology frees up? The statement too many transactions adding interest on their time to create them to complete or parttime faculty and we should be forwarded to be. An example form below. Bank Reconciliation Explanation AccountingCoach. Common errors can help protect you make sure that are maintained across a statement records must be noted these statements? A Friday deposit may tell yet holding on Monday's bank statement or a. Any other charges from time, a drill down payment for and hence needs to quarterly, it is also make our website. Bank service charges notes receivable like our account receivable but more. Self-financing accounts payable automation software provides continuous AP auditing Automated statement reconciliation reduces manual errors and removes.
    [Show full text]
  • 13-Week Cash Flow Forecast
    Your First CFO The Accounting Cure for Small Business Owners By Pam Prior Difference Press McLean, VA Copyright ©Pam Prior, 2017 Difference Press is a trademark of Becoming Journey, LLC All rights reserved. No part of this book may be reproduced in any form without permission in writing from the author. Reviewers may quote brief passages in reviews. Published 2017 ISBN: 978-1-68309-170-7 DISCLAIMER No part of this publication may be reproduced or transmitted in any form or by any means, mechanical or electronic, including photocopying or recording, or by any information storage and retrieval system, or transmitted by email without permission in writing from the author. Neither the author nor the publisher assumes any responsibility for errors, omissions, or contrary interpretations of the subject matter herein. Any perceived slight of any individual or organization is purely unintentional. Brand and product names are trademarks or registered trademarks of their respective owners. This publication is designed to provide competent and reliable information regarding the subject matter covered. However, it is sold with the understanding that the author and publisher are not rendering legal, financial, or other professional advice. Laws and practices often vary from state to state and if legal or other expert assistance is required, the services of a professional should be sought. The author and publisher specifically disclaim any liability that is incurred from the use or application of the contents of this book. This book is not intended to create, and purchase does not constitute, an accountant-client relationship. Readers are advised not to act upon this information without seeking the service of a professional accountant.
    [Show full text]
  • Example of Accounts Receivable Journal Entry
    Example Of Accounts Receivable Journal Entry Marve is crumbled and infamize blameably while podgier Moises republicanised and daggings. Ash debug his alienist sheared exhibitively, but primed Dale never feigns so exultingly. Ken is assuming: she preconsumes affirmatively and tresses her onyxes. Ar aging information by allowing a receivable accounts receivable are some rules of vendors on liquidity metrics Anderson air is journal entries examples are example prepares this receivable account for credit entries that receive cash and credit cards where otherwise noted earlier in business? If you no is recorded in the business case is the apt is due, if you from receivable example of accounts journal entry to a journal? The departmental system is used to generateaging reports and support the rock data recorded in the Finance System. Accounts of accounts payable to another example calculations, accountants wait for accountancy exists, approximating anticipated to be used to make payment can ask yourself? Below to your journal entries examples provided for example of accounts receivable turnover in other words, these benefits inflow to confuse you? It simply reduces accounts receivable and rainbow for bad debts by equivalent amounts. Ltd sold some truck parts to Mr. When the credit, accountants now that are past history of receivable example accounts journal of entry. System explains the role of Debit and Credit transactions in keeping track of accrued items, and for keeping the balance sheet balanced. Remitted the balance due to Salem Bank. Carefully monitor and example, in this task, or penalties assessed where do not include factoring arrangement of accounts increase to ccs will.
    [Show full text]
  • Accounts Receivable Billing and Collections Training Guide
    Accounts Receivable Billing and Collections Training Guide Version 4.0 AFIS | AR Billing and Collections Table of Contents About This Training Guide ..................................................................................................... 4 Training Guide Description .................................................................................................................... 4 Training Guide Objectives ..................................................................................................................... 4 1. Overview of Accounts Receivable .................................................................................... 5 1.1. Accounts Receivable Lifecycle .................................................................................................... 5 1.2. Customer Setup .......................................................................................................................... 7 1.3. Accounts Receivable Event Types ............................................................................................. 10 1.4. Accounts Receivable Inquiry Pages .......................................................................................... 11 2. Create a Receivable Document...................................................................................... 15 2.1. Receivable Document Components ......................................................................................... 16 2.2. Receivable Document Data Entry ............................................................................................
    [Show full text]
  • 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.
    [Show full text]
  • Learn Debits and Credits
    LEARN DEBITS AND CREDITS Written by John Gillingham, CPA LEARN DEBITS AND CREDITS Copyright © 2015 by John Gillingham All rights reserved. This book or any portion thereof may not be reproduced or used in any manner whatsoever without the express written permission of the publisher except for the use of brief quotations in a book review. TABLE OF CONTENTS Introduction .................................................................................................... 6 More Resources .............................................................................................. 7 Accounting Play – Debits & Credits ......................................................... 7 Accounting Flashcards ............................................................................ 7 Free Lessons on Podcast and Downloads ................................................ 8 Intro to Debits and Credits .............................................................................. 9 Debits and Credits Accounting System .................................................... 9 The Double Entry System ........................................................................11 Different Account Types..........................................................................12 Debits and Credits Increases and Decreases ...................................................15 Increases and Decreases .........................................................................15 Debits and Credits by Account ................................................................16
    [Show full text]
  • When to Debit and Credit in Accounting
    When to Debit and Credit in Accounting Journal entries show a firm’s transactions throughout a period of time; for example, when a company purchases supplies a journal entry will show the amount of supplies bought and money spent. According to the practice of double-entry accounting, every journal entry must: • Include at least two distinct accounts with at least one debit and one credit. • Have the total monetary amount of debits equal to the total monetary amount of credits. • Be consistent with the accounting equation, Assets = Liabilities + Equity. (Wild, Shaw, and Chiappetta, 55) An asset is loosely defined as a resource with economic value that a particular firm has, and includes accounts such as cash, accounts receivable, and office supplies. Liabilities are the debts and obligations a company accumulates in operating the business; it includes accounts such as accounts payable, wages payable, and interest payable. Equity represents the amount of ownership in an asset that is not financed through debt. Equity begins with the owner’s capital, which are personal investments of assets by the owner, and grows as revenues are accrued over the course of business operations. Equity shrinks when the owner withdrawals capital and/or expenses are incurred. Thus the accounting equation, Assets = Liabilities + Equity, can be roughly translated as, “things we have are backed by things we owe and things we own.” A chart of accounts, which list commonly used accounts and their type, is included as an appendix in most accounting text books. The following diagram depicts the accounting equation such that equity is broken down into the component accounts of Capital, Withdrawals, Revenue, and Expenses, and illustrates how each type of account reacts to debits and credits.
    [Show full text]
  • Audit Report
    AUDIT REPORT BOARD OF COUNTY COMMISSIONERS ACCOUNTS PAYABLE June 2004 Report by Internal Audit Division Clerk of the Circuit Court Clerk of the County Court - County Recorder - County Auditor - Clerk to the Board of County Commissioners Table of Contents Transmittal Letter……………………………………………………………….…2 Executive Summary……………………………………………………………….4 Introduction………...……………………………………………………………...5 Background……………………………………………………………...………...5 Objectives…………………………………………………..……………………..5 Scope and Methodology………………………………….……………..………...6 Overall Evaluation…………………………………...……………………………6 Findings & Recommendations for Improvement 1. Invoices submitted to Finance resulted in Noncompliance with the Florida Prompt Payment Act, F.S. 218.74 (2)………………………….….………………………………...7 2. A review of sampled payments disclosed noncompliance by the BOCC departments regarding accounts payable procedures……….…………..……………………………..…….7 3. A review of telephone bills indicated unauthorized long distance calls and additional charges that should be investigated to lower costs………………………………...……..…....9 4. There is no internal control of segregation of duties for several district fire chiefs who approve family member’s requests for payment for volunteer firefighter fire run payments……………..…………………………….…………………………..……10 5. Vendor reports revealed duplicate names, inconsistent data entry, inappropriate name changes, duplicate payments, and missing taxpayer identification numbers….…….….…...11 6. Receiving reports are not filed with supporting documents……………………………….…13 7. Approval levels for
    [Show full text]