Negative working capital management: an up-to-the limit application of the concept of supply chain management in corporate finance

Working capital is the most liquid and dynamic component of total assets. Working capital management, as the core content of short-term corporate finance, is vital to enterprises' survival and development and plays an important role in maximizing shareholders' wealth. In this paper, we test the differences in profitability and risk levels from 2002 to 2006 between Chinese listed companies which pursue positive and negative working capital policies with the method of One-Way ANOVA. Furthermore, the first sample is eventually subdivided according to net commercial credits into two sub-ones, namely positive and negative commercial credits. Same analyses are done on above two sub-samples again. To find out how and what factors influence enterprises' profitability through different working capital polices, we do linear regression analyses. The results show: the proportion of Chinese listed companies which adopt the policy of negative working capital is steadily rising year by year; they have gained greater improvement in performance; however, relatively higher risk can not be ignored; companies can improve their performance by increasing the ratio of current assets to total assets (CAAR), the ratio of net cash inflows from operating activities to current liabilities (COACL), growth rate of total assets(GRA) and the size of total assets(LNAT) or shortening days of working capital (DWC) and reducing the ratio of current liabilities to total assets(CLAR). In this paper, net commercial credits are firstly introduced into working capital research and as much attention is paid to risk indicators as to profitability ones. Such a practice is absolutely a meaningful try in this type of study. The conclusion of this paper not only supports the concept of "negative working capital" and its technical application, but also gives useful suggestions to listed companies both in China and other countries.