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Strategic Data-Based Optimization of Working Capital Management in Medium-Sized Firms: A Real-World Case Study

Strategic Data-Based Optimization of Working Capital Management in Medium-Sized Firms: A Real-World Case Study

Milan Branko Vemic (USAID Business Enabling Project, Serbia)
Copyright: © 2015 |Pages: 36
DOI: 10.4018/978-1-4666-8122-4.ch002
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Abstract

The chapter explores whether and to what extent a systemic approach to optimal management of working capital stemming from database wisdom exists in medium enterprises in Serbia as a transition economy. The chapter portrays the level of optimization of all key components of working capital management and addresses indispensable strategic directions for Serbian entrepreneurs and managers that could have broader application in transition context. Ultimately, the chapter explores how to achieve better and more effective results in the development of medium enterprises by optimizing database wisdom for working capital management. As a research paper, the chapter reviews the experiences from Serbia and compares them with achievements in other transition and more advanced economies. In a case study undertaken in Serbia with semi-structured interviews in medium-sized enterprises, the author examines the specific preconditions for increasing the current perceived inefficient use of working capital and extend for discussion an optimization model based on tested hypotheses.
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Background On Theories Of Working Capital Management

In the second half of the twentieth century application of scientific methods of explicative analysis of individual WCM database wisdom factors in enterprises has begun more actively. The classification of these methods can be surely performed in a variety of ways, and using a number of different principles. One approach would be to use different portfolio models to determine how the company planned working capital for operational supply chain decisions. This is discussed and examined by authors such as KPMG International Cooperative [KPMG], (2012) and Shapiro (2001). Other notable researchers discussed if it has several products that are introduced to the market, how it carries out the allocation of resources at the strategic level for product positioning and how decisions are made to determine the strategic business units in conditions of limited working capital Neubauer (1991).

Related to optimization is a method based on optimal individual financial policies, such as borrowing and investing own resources or reinvesting profit as observed by eminent Knight (1972). The next possible avenue could be to explicatively use one form of a SWOT analysis (strengths, weaknesses, opportunities, threats) with assumptions, capabilities, future goals and current strategy for competitor analysis with which an enterprise can actually balance the business sustainably and optimize business behavior in relation to the features and condition of the environment Porter (1998, pp. 47-74).

Finally, in a holistic approach which is closest to our research and philosophy, integration of all WCM components within a cash-to-cash cycle is advocated as used in more recent annual working capital survey of top companies (CFO magazine/REL Working Capital Scorecard [CFO], 2013; CFO 2014). A somewhat broader literature review on the subject matter of this chapter is also summarized in Table 1.

Table 1.
Broader literature review
Research CategoriesMost Significant Authors
Enterprise capital structure Modigliani & Miller (1958,1963); Knight (1972); Kraus & Litzenberger (1973); Ross (1977); Bradley, Jarrell, & Kim (1984); Majluf (1984); Jensen (1986); Masulis (1988); Wessels, Titman, Stulz (1990); Harris & Raviv (1991); Berger & Udell (1994, 1998); Leland (1994); Fluck (1998); Miller (1998); Myers (1977, 2001); Westphalen (2002); Frank & Goyal (2006);
Integration of receivables
and inventories		(Beranek, 1963); (Shapiro, 1973, 2001); (Bierman, Chopra, & Thomas, 1975); (Sartoris et al., 1983); CFO scoreboard 2007,2013, 2014.
Integration of inventories
and payables		(G. Hadley, 1964); (Beranek, 1967); (Haley & Higgins, 1973), CFO scoreboard 2013 & 2014.
Integration of all WCM components(Damon & Schramm, 1972); (Baker & Damon, 1977); (Crum et al., 1983); (Thompson, 1986); (Kim & Chung, 1990) KPMG (2012); Aberdeen Group (2008); Danske Bank & Ernst & Young, 2009, 2013.

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