Workings of the operating cash cycle in the retailing sector.

• Author: Croucher, John S.

1. INTRODUCTION

   'If you asked any finance chief a year or two year ago how important it was to focus on working capital they would say "yes, of course". The difference now is they would actually mean it', said AGL Energy CFO Stephen Mikkelsen, to CFO Financial Review March 2009. The significant difference between then and now is of course the global financial crisis (GFC) that started in the United States in early 2007, resulting in higher financial costs and a limitation of credit. A collapse in one part of the world affects the rest. The subprime crisis that began to unfold in 2007 has morphed into a credit crisis that has caused major disruptions to financial institutions in the United States, Europe, and everywhere else; no one is immune. Even worse, many big businesses relied on borrowed cash have faced a critical situation. For example, Lehman Brothers Holdings Inc. filed for bankruptcy and Merrill Lynch & Co. was sold to Bank of America Corp. GM and Chrysler have already followed Lehman, and the remaining big automotive manufacturer, Ford, is struggling to find a way not to follow suit (Strumpf and Johnson, 2009). Liquidity in financial markets is nowhere to be found; loans are hard to come by and--cost of borrowing is getting higher financially and socially. Obviously, in the difficult credit environment all enterprises turn back to internal funds, which is why Working Capital is important.

   Previously, the more rapidly that a business expanded, the greater the need for working capital. Today, under the twin pressures of financial markets and intense competition, it is essential that firms develop a more dynamic approach in managing working capital, not only for business expansion but simply to survive in day-to-day operations. Only an enterprise with dynamic capabilities can be successful and able to manage through this tough time. For that reason, corporate liquidity is now a source of competitive advantage and dynamism for the enterprise. If the firm has insufficient working capital--the money necessary to keep the business functioning--and meet short-term debts as they fall due, it is in trouble. However, by implementing sound working capital management strategies, the enterprise can flourish, even under difficult trading conditions. Indeed, it is fair to say that the Operating Cash Cycle is one of the most significant corporate liquidity ratios for working capital optimization. It is a financial performance measure that represents how an enterprise manages its entire supply chain, from customers to suppliers, and strategic to operational levels.

2. BACKGROUND

   The concept of a Cash Conversion Cycle (CCC), also called the Operating Cash Cycle (OCC), is an expression of time, in number of days that it takes to purchase raw materials for production, convert them into goods, sell them, and collect the accounts payable for those sales. The normal process is performed within a period of an operating cycle and was introduced over thirty years ago (Hagar, 1976) before the global financial deregulation in the early 1980s. Later research papers in this area adopted different approaches, the next most significant being the suggestion that operating cash cycle analysis should be used to supplement the traditional static liquidity ratio analysis because it provides dynamic insights.

   In recent times there has been an examination of the cash conversion cycle (CCC) as a liquidity indicator for Greek companies in the food industry and tried to...