Financial and Operating Working Capital: Unraveling Obscured Portion of Balance Sheet

ABSTRACT Purpose- The purpose of this study is to provide a new obscured aspect of financial working capital in working capital management, and investigate the association between financial and operating working capital with business performance. This paper also examines the interacting effect of net cash flow on this relationship. The current study introduces a modification in cash conversion cycle (CCC) by taking concealed trade advance payments. Design/methodology/approach- This study employs fixed effect regression model, covering a sample of Automobile sector companies, listed at Pakistan Stock Exchange (PSX) for the period of fourteen years from 2005 to 2018. Secondary data is collected from companies’ financial annual reports, PSX website, and Balance sheet analysis of State Bank of Pakistan (SBP). The study is explanatory and deductive in nature. Financial working capital (FWC) and new measure of operating working capital (OWC) i.e. modified cash conversion cycle (mCCC) is introduced & empirically tested with 252 firm-year observations. Findings- The regression results shows, a convex association between OWC & FWC, with business performance, in dearth of internal cash. However, after taking interacting effect of internal availability of cash, only FWC relation has become concave. The result also shows that mCCC provides a more realistic view of OWC. Research limitations/implications- This study has considered, concealed trade prepayments only, further research could include other components in mCCC. Moreover micro, macro factors and status of the economy such as depression or boom may also affect the results of the research. The findings suggest that managers should separately deal operating & financial working capital. Firms’ performance can be enhanced, if Finance Manager Take account internal cash of the firm. In case of deficiency (sufficiency) of it, he should work to decrease (increase) the investment amount in operating working capital (financial working capital). Overall, the results will be helpful to the financial experts and business practitioner in analyzing, and utilization of their resources. Originality/value- This study adds a new dimension in working capital by separating it into operating and financial working capital. The study also offers insights into the new knowledge of extension in CCC, role of concealed advance payments and internal cash flow, for class teachers and business practitioners. It will also describe the new avenues for further research in this field. Key Words: Financial working capital, Operating working capital, Trade advanced payments and modified cash conversion cycle (mCCC).