\"Net operating working capital captures multiple dimensions of firms’ adjustmen

Question

"Net operating working capital captures multiple dimensions of firms’ adjustments to operating and financial conditions. Sales growth, uncertainty of sales, costly external financing, and financial distress encourage firms to pursue more aggressive working capital strategies. Firms with greater internal financing capacity and superior capital market access employ more conservative working capital policies. Results are robust to unobserved heterogeneity and industry effects. The evidence suggests that operating and financing conditions should be considered when evaluating working capital behavior, not just industry averages. Additionally, industry concentration magnifies the effect of sales growth."

It is suggested that operating and finance conditions should be considered when evaluating capital behavior, not just industry averages. Discuss, in detail, the results of these findings and find a minimum two additional references that support this position.

Explanation / Answer

Each firm differs from others in term of operating and financial conditions. Operating conditions are defined through sales and its growth, gross profit margin, operating cash flows as well as market share. Each condition affects differently. Financing conditions are defined by reach to capital market and financial distress.

Higher sales and growth makes firms more comfortable and aggressive in their capital behavior management and managing their operating working capital needs.

Higher gross profit margin also gives a better condition to take care of capital behavior and it is also complimented by higher operating cash flows and its consistency. Though , market share has not yet justified a strong impact upon decisions related to operating WCR. In financial conditions, Reach to capital market is very important. Superior reach makes company go for better choice of financing and opt for wise decisions. Financial distress cause the opposite and companies act in haste as they are facing distress.

Thus, it is the firms’ own conditions that defines their behavior as far as capital procurement and related issues are concerned. And it is the grouped behavior of firms that build industry averages rather reverse happens.

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