Towards Inter-organizational Working Capital Management

Abstract

Working capital is an investment which is tied up into the inventories and accounts receivable
\nand which is released with accounts payable. Due to the current business landscape with
\ntightened financial conditions and finance markets, organizations emphasize efficient working
\ncapital management. With efficient working capital management, a company can reduce the
\nneed of finance, free up cash, increase profitability, improve liquidity, increase the efficiency
\nof operations, and decrease (financing) costs. From the perspective of an individual company,
\nefficient working capital management means decreasing inventory levels by shortening the
\ncycle time of inventories, decreasing accounts receivable by shortening the trade credit terms
\nand effective collection procedures, and increasing the level of accounts payable by paying
\nthe suppliers later. From an inter-organizational perspective, however, working capital should
\nnot be sub-optimized by a single company but holistic view to working capital management
\nthrough the supply chain should be adopted to create value and improve performance
\ntogether.
\nThe purpose of this research is to take academic research as well as practical management
\ntowards inter-organizational working capital management. The thesis discusses the benefits as
\nwell as mechanisms of working capital management in the inter-organizational context and
\nhas two main objectives: (1) to examine the effect of inter-organizational working capital
\nmanagement on performance in the value chain context and (2) to develop models of working
\ncapital management for internal as well as inter-organizational value chains.
\nThe results of the archival research conducted in the value chain of the pulp and paper
\nindustry and the value chain of the automotive industry indicate that companies can increase
\nrelative profitability by managing working capital comprehensively by taking into account all
\nthree components, and holistically though the value chain. Companies in the value chain
\nbenefit from different strategies in working capital management depending on the position of
\nthe company in the value chain. This can be taken into account in inter-organizational
\nworking capital management. The effects of inter-organizational working capital management
\nactions on the financing costs of working capital were studied via simulations. Simulations
\nalso show that the value chain and individual companies benefit from an inter-organizational
\nview to working capital management. Inter-organizational working capital management actions include for example: shortening the cycle time of inventories, reducing product costs,
\nshifting inventories, shortening payment terms, and considering the cost of capital.
\nThe thesis also provides solutions for the practical requirements for tools to control working
\ncapital. The design science part of the research introduces the adjusted cash conversion cycle
\n(ACCC) model for internal value chains, as well as models for working capital management
\nin the inter-organizational value chain context: the working capital management model
\n(WCMM) and the financial cycle time model (FCTM) designed in corporation and product
\nlevels respectively.
\nThis research contributes to literature on working capital management and interorganizational
\naccounting. The research gives a holistic, inter-organizational view to the
\nmanagement of working capital. It advances the knowledge in working capital management
\non operational level, increases knowledge in the recently risen theme of supply chainoriented,
\ncollaborative working capital management, combines management accounting
\nresearch with supply chain management research, and contributes to the demand of practical
\ninter-organizational accounting methods. In addition, the research has strong practical focus
\nas new managerial methods are introduced.