Impact of dynamic working capital management on operational efficiency: empirical evidence from Scandinavia

Abstract

Purpose - Consumer goods firms often tie up inventory and accounts receivable resources, creating cost and liquidity issues. Dynamic working capital management (DWCM) can mitigate these concerns and enhance operational profitability. The study investigates DWCM's impact on operational efficiency (OE).<p>

<p>Design/methodology/approach - The empirical estimation uses pooled ordinary least squares (OLS), random effect and system generalized method moments (GMM) regression analysis of consumer goods firms in Scandinavia from 2005 to 2022 to present the results.<p>

<p>Findings - The findings indicate that DWCM has an inverse relationship with operating cost, while positively impacting operating profit. The final outcome demonstrates that DWCM enhances OE. Furthermore, the working capital ratio (WCR) consistently exceeds the cash conversion cycle (CCC) in all models, indicating that prudent management of cash in accounts receivable, inventory and accounts payable leads to higher cost savings and superior performance.<p>

<p>Practical implications - The results suggest that organizations that prioritize the management of the absolute cash committed to inventory, receivables and payables as much as the CCC experience improved OE.<p>

<p>Originality/value - This paper adds to the literature on how DWCM affects OE in the consumer goods sector. It also highlights the impact of time management and cash management in WCM on OE. Additionally, it analyzes how DWCM variables affect operating costs and profits, shedding light on their efficiency impact.