2. THEORETICAL FRAMEWORK AND HYPOTHESIS DEVELOPMENT2.1 Measures and MetricsA firm’s cash flow can be manipulated in three ways: (i) the time from when goods are sold until the revenue is collected by the firm may change; (ii) the firm’s inventory levels may change; and (iii) the time that a firm takes to pay its vendors may change. When assessing or manipulating a firm’s cash positions, one can monitor either individual measures of each of these three cash flow levers or metrics that are combinations of the three measures. The three measures and two composite metrics defined below represent the measures and metrics that commonly have been utilized in previous cash flow studies:Days of Sales Outstanding (DSO): This measure represents the average time from when a sale occurs until the revenue is collected. It is calculated as the end of period accounts receivable divided by the sales, multiplied by the number of days in a period. Days of Inventory Outstanding (DIO): This measure captures the average time that goods are held in inventory before they are sold. It is calculated as the end of period value of inventory divided by the cost of goods sold, multiplied by the number of days in a period.Days of Payables Outstanding (DPO): This measure expresses the average time that a firm takes before paying its creditors. It is calculated as the end of period accounts payable divided by the quarterly purchases, multiplied by the number of days in a period.Cash Conversion Cycle (CCC): The CCC metric (also called the Cash-to-Cash Cycle) combines the three cash flow metrics to provide an overall indicator of a firm’s cash position. It is calculated as the sum of Days of Sales Outstanding and Days of Inventory Outstanding, minus the Days of Payables Outstanding. The CCC represents the time period required to convert cash investments in supplies into cash receipts from customers for goods or services rendered.Operating Cash Cycle (OCC): The OCC metric uses only a subset of the CCC metric. It is calculated as the sum of Days of Sales Outstanding and Days of Inventory Outstanding. OCC differs from CCC in that it includes only inventory and sales outstanding. It does not consider payables, and therefore equates to the number of days that cash is held as inventory before payment is received from the customer.Additionally, Table 1details the calculations for each of the measures and metrics.--------------------------- Insert Table 1 Here---------------------------2.2 Prior Cash Flow Management Research2.2.1 Theoretical commonalities--------------------------- Insert Table 2 Here---------------------------Table 2 summarizes the methods and findings of 12 relevant prior empirical studies that examine the relationship between cash flow and performance from an operations or supply chain management perspective. Although numerous additional academic studies have examined cash flow in many operational contexts, these 12 studies were selected specifically because they attempt to link firm performance with cash flow.These studies employ a variety of methods to examine different aspects of the cash flow management questions; however, they all share a common theoretical groundwork: the studies assert that effective cash flow management improves a firm’s liquidity, which previously has been linked to improved firm financial performance (Gitman et al.,1979). The performance improvements related to increased liquidity result primarily from an improved cash position, better credit, a reduced risk of bankruptcy, and/or the ability to self-finance new business initiatives (Churchill & Mullins, 2001; Moss & Stine, 1993; Richards & Laughlin, 1980; Stancill, 1987). Further, these studies consistently predict that actions that shorten the cash cycle and improve liquidity (i.e., shortening the receivable cycles, shortening inventory holding periods, and extending payment cycles) will improve firm financial performance.Eleven of the twelve previous investigations detailed in Table 2 examine firms’ cash positions using the Cash Conversion Cycle (CCC) metric. Nine of the studies explore these individual measures that comprise the CCC as well as the composite CCC metric itself; however, Moss and Stine (1993) and Ebben and Johnson (2011) examine only the CCC metric. In the study that does not focus on CCC, Churchill and Mullins (2001) examine the Operating Cash Cycle (OCC) metric. The metrics and their component measures are calculated with relative consistency across these papers. The specific relationships between the cash flow measures and metrics and firm performance are discussed below: Days of Sales Outstanding (DSO) and Firm Performance:A firm’s ability to receive payments from customers for delivered goods or services rendered in a timely manner can improve the firm’s liquidity (Gallinger, 1997). The cash received from a firm’s customers may be used to invest in activities intended to promote additional sales. Therefore, the more quickly that payments are received (i.e., the shorter a firm’s DSO is), the more opportunity the firm will have to pursue such activities (Bauer, 2007). Further, research has shown that when a firm extends the accounts receivables period through the use of credit sales, the risk of collecting the outstanding receivables increases significantly (Tsai, 2011). Based on these factors, working capital management theory commonly predicts that a shorter DSO relates to improved firm financial performance (Churchill& Mullins, 2001; Farris & Hutchinson, 2002, 2003; Stewart, 1995). Although shortening DSO can be viewed as unfavorable to the customer, firms often utilize incentives, such as early payment discounts, in an effort to shortentheir DSO cycle without damaging their supplier relationships (Moran, 2011). Previous research supports this view;Wort and Zumwalt (1985) find that payment incentive programs, where a firm willingly accepts less revenue in trade for faster access to cash, improve the probability of payment and reduce risk within the firm.Days of Inventory Outstanding (DIO) and Firm Performance:Although widely examined in the literature, the relationship between inventory and firm financial performance is not simplistic (Shah & Shin, 2007). Inventory is an asset, in that firms typically must carry it in order to provide goods to their customers in a timely fashion, which means that reductions in inventory may lead to reductions in customer service. However, by holding inventory, cash invested in inventory is unavailable, and the firm is forced to incur carrying costs; hence, inventory reductions may reduce holding costs and free up cash that can be reinvested to increase sales. Additionally, changes in the inventory levels at a firm have been linked to an increase in the magnitude of the bullwhip effect experienced by partners upstream in a supply chain (Tangsucheeva & Prabhu, 2013). Although inventory reductions have the potential to both damage and improve firm performance, the preponderance of evidence in the literature suggests that shorter inventory holding periods (i.e., lower DIO) generally associate with improved liquidity and better firm financial performance (Capkun et al., 2009; Chen et al., 2005; Koumanakos, 2008; Swamidass, 2007). Further, it has been shown that excessive inventory levels are related to poor operational and financial performance (Singhal, 2005). Although lowering inventory conceptually may seem to expose a firm to a greater risk of stock-outs, in practice, firms often are able to reduce inventories without sacrificing service through methods including Lean/Just-In-Time management programs, automated replenishment systems, Vendor Managed Inventory (VMI) programs, and consignment inventory programs (Achabal et al., 2000; Harrington, 1996; Myers et al., 2000). These types of programs successfully lower inventory levels by substituting additional inventory with better information, which has been shown to reduce inventory levels effectively without damaging performance (Milgrom& Roberts, 1988).Days of Payables Outstanding (DPO) and Firm Performance:Like DIO, the relationship between DPO and firm financial performance is complex. Extending the payment cycle clearly will allow a firm to hold on to cash longer, resulting in improved liquidity (Stewart, 1995). However, when a firm extends its payment cycle, it is forgoing early payment discounts and possibly harming its relationships with suppliers (Fawcett et al., 2010). Additionally, when a supplier is starved of cash due to long payment cycles, the overall supply chain may be impacted negatively over the long-term (Raghavan & Mishra, 2011). Longer payment cycles also may be forcing a firm’s suppliers to provide lower levels of service (Timme & Wanberg, 2011). Unlike inventory, where a shorter DIO consistently has been linked to improved performance in the literature, the relationship between DPO and performance is less clear in the literature; for example, Farris and Hutchison (2002) use cases to show that higher performing firms have longer DPO periods, and Deloof (2003) and Garcia-Teruel and Martinez- Solano (2007) both empirically find that shorter DPO periods are related to higher firm financial performance. Cash Conversion Cycle (CCC), Operating Cash Cycle (OCC) and Firm Performance:The eleven CCC focused studies referenced in Table 2 propose that improved cash flow management (i.e., a shorter CCC) theoretically is associated with improved firm liquidity, and hence with improved firm financial performance. Similarly, Churchill and Mullins (2001) propose that a shorter OCC is also associated with better firm liquidity and performance.
2.2.2 Prior methodologies
The methods used to investigate cash flow management strategies vary substantially across the literature: four of the papers use case-studies (Churchill & Mullins, 2001; Farris & Hutchinson, 2002; Randall & Fa
đang được dịch, vui lòng đợi..