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Article
Publication date: 9 October 2018

Tarek Eldomiaty, Marwa Anwar and Ahmed Ayman

The purpose of this paper is to explore the potential benefits of an optimal vs observed working capital; the latter being measured by cash conversion cycle (CCC). Optimal CCC is…

Abstract

Purpose

The purpose of this paper is to explore the potential benefits of an optimal vs observed working capital; the latter being measured by cash conversion cycle (CCC). Optimal CCC is defined and measured as the CCC that maximizes sales in the last four quarters. The initial exploratory results show that optimal CCC has been shorter than the observed. In addition, shorter CCC is accompanied by higher return on investment.

Design/methodology/approach

The authors use various statistical tools to analyze the differences between determinants of observed and optimal CCC. These statistical tools include Johansen cointegration test, linearity, normality tests, cointegration regression and Granger causality. The authors also use the benefits of discriminant analysis in order to reach a Z-score model that can be used for monitoring the move from an observed to optimal working capital.

Findings

The results show that: significant association exists between volatility of sales and CCC; sales volatility and lagged growth of sales carry relatively the highest weights when a firm moves from observed to optimal CCC; shorter CCC is associated significantly with higher profitability; the observed CCC adjusts to an optimal level; as inflation rises causing potential rise in cost of goods sold, firms prefer staying away from optimal levels of working capital; as economic growth slows down, firms stay at the current level of observed working capital; the results are subject to industry and size effects; and the DJIA and NASDAQ listed firms adjust observed CCC to optimal level slowly.

Originality/value

This paper offers three advances in the literature. The first advance is that the paper determines an optimal level of working capital empirically. To the best of the authors’ knowledge up to the date of submission, other related studies did not include an empirical solution to determine optimal working capital. The second advance is that the paper develops an empirical discriminant model that can be used for monitoring firms’ move from an observed to optimal working capital. The third advance is that optimal working capital shows the empirical integration between short-term and long-term investments that results in an improvement to firm’s liquidity and profitability.

Details

Journal of Economic and Administrative Sciences, vol. 34 no. 3
Type: Research Article
ISSN: 1026-4116

Keywords

Article
Publication date: 6 February 2019

Joyce Patience Awo and Joseph Oscar Akotey

Rural and community banks (RCBs) provide financial services to small enterprises in rural and sub-urban areas. The purpose of this paper is to examine their financial performance…

1008

Abstract

Purpose

Rural and community banks (RCBs) provide financial services to small enterprises in rural and sub-urban areas. The purpose of this paper is to examine their financial performance through a case-specific evaluation of a small bank situated in the northern part of Ghana.

Design/methodology/approach

The authors employed a triangulation method comprising relative ratio analysis, bivariate and generalized method of moments (GMM) techniques for the evaluation of the audited annual financial statements of the bank covering a period of 15 years.

Findings

The relative ratio analysis show that the bank's financial performance has generally been above the average of the rural banking industry. The bivariate analysis indicates that although the loans portfolio is positive, it is not properly fitted. That is, some of its loan portfolio deviates from the path of expectation. The GMM analysis indicates that its financial performance is significantly influenced by liquidity management, bank capital and size which have enhanced its expansion and intermediation to rural households and microenterprises. However, an increase in the government treasury bill rate has a declining effect on the bank’s profitability.

Practical implications

The findings have significant policy implications for the management and supervision of RCBs. RCBs should deal with the spillover effects of the banking and MFIs’ crisis by educating and re-assuring their customers of their financial integrity. Most importantly, they differentiate their services from the other financial institutions within the space of the rural financial architecture.

Originality/value

Majority of research into this area has focused heavily on large commercial banks. This research adds value to the literature by re-focusing the searchlight on the financial performance of small banks.

Details

World Journal of Entrepreneurship, Management and Sustainable Development, vol. 15 no. 1
Type: Research Article
ISSN: 2042-5961

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