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QRFM
6,3
Working capital management
during the global financial crisis:
the Australian experience
332 Vikash Ramiah, Yilang Zhao and Imad Moosa
School of Economics, Finance and Marketing, RMIT University,
Received 21 September 2012 Melbourne, Australia
Revised 24 April 2013
21 June 2013
17 July 2013
Accepted 7 August 2013 Abstract
Purpose – This paper aims to document the measures taken by Australian corporate treasurers in the
areas of cash, inventory, accounts receivable, accounts payable and risk management to survive the
global financial crisis (GFC).
Design/methodology/approach – Using qualitative techniques like interviews and a survey
questionnaire, this paper summarises the various measures adopted by working capital managers.
Findings – The results show that more than half of the participants in the survey altered their working
capital management practices during the crisis. Capital expenditure was curtailed, as they aimed at
preserving their cash levels while reducing inventory levels. Credit worthiness of institutions became
more important, and there was a general decline in credit availability. The results also show that
Australian working capital managers exhibit behavioural biases, particularly overconfidence.
Originality/value – It is the first paper that uses open-ended questions to capture the effects of the
GFC on working capital management in Australia.
Keywords Global financial crisis, Behavioural biases, Corporate treasurers,
Working capital management
Paper type Research paper

Introduction
A significant amount of research has been carried out on the global financial crisis (GFC),
dealing with issues such as the causes of the crisis, the extent of the damage it has inflicted,
its spillover effects and its macroeconomic consequences. However, little has been done on
working capital management during and after the crisis, which is rather strange given that
the crisis was characterised by severe liquidity shortages. What is not surprising, however,
is that this observation falls in line with the general tendency to ignore working capital
management as a secondary function, particularly in the academic literature.
Working capital is defined as current assets minus current liabilities – it indicates a firm’s
potential liquidity position. Working capital management includes cash management,
inventory management, accounts receivable management and accounts payable
management. In Australia, working capital management generally falls under the
responsibility of corporate treasurers or working capital managers. The management and
Qualitative Research in Financial
control of working capital is of paramount importance for a company’s financial health.
Markets
Vol. 6 No. 3, 2014
pp. 332-351 JEL classification – G01, G02, G31, G32
© Emerald Group Publishing Limited
1755-4179
The authors are grateful to an anonymous referee for useful comments. The authors would also
DOI 10.1108/QRFM-09-2012-0026 like to thank late Professor Tony Naughton for his support on this project.
Efficient working capital management is conducive to the avoidance of potential financial Working capital
difficulties. Poor working capital management may lead to financial distress, which boosts
the probability of bankruptcy. Berryman (1983) and Dunn and Cheatham (1993) argue that
management
inadequate working capital management is the primary reason for small business failures in
the UK and the USA. When firms are either in distress or approaching bankruptcy, working
capital management becomes of interest to banks and legal advisers. Banks tend to rely on
working capital to decide whether or not to offer additional business loans, whereas legal 333
advisers require information on working capital data to determine whether a firm is legally
bankrupt. Working capital is a proportion of the shareholders’ funds and (as a form of slack)
is a common way to free up cash. It is not clear, therefore, why working capital management
has been ignored by academics.
The objective of this study is to document the practices adopted by working capital
managers in Australia and how their behaviour was affected by the global financial crisis.
We attempt to find out if the observations about the response of working capital managers
to the global financial crisis are captured by some economic and financial variables. We go
further by considering some behavioural finance aspects of working capital management.
This exercise is based on a survey that was conducted in March 2009.

Literature review
Research on working capital management revolves around two issues:
(1) determinants of working capital management (Gentry et al., 1979; Chiou et al.,
2006); and
(2) the relation between working capital management and profitability (Garcia-
Teruel and Martinez-Solano, 2007; Banos-Caballero et al., 2010).

Graham and Harvey (2001) initiated a debate as to whether risk is another

determinant of working capital management, leading to the proposition that risk
management is the fifth determinant. For example, Smith and Thompson (2007)
demonstrate the importance of credit risk management in the process of monitoring
the debt portfolio. Moosa (2007) and Abrams et al. (2007) highlight the significance
of operational risk arising from factors such as incompetent staff, fraud, inefficient
processes and external factors. Liebesman (2008) suggests that the adoption of ISO
9001 contributes to risk management and that this enhances various areas such as
customer satisfaction, supply chain, revenue recognition, information security,
logistics and natural disaster management. On the other hand, Verschoor and
Muller (2007) and Kalamkar (2007) explain the importance of market risk in the
day-to-day running of a business.
Another strand of the literature concentrates on each of the determinants of working
capital. Tsamenyi and Skliarova (2005) examine international differences in cash
management practices and show that concepts such as reinvoicing centres, leading and
lagging[1], netting and cash flow forecasting are used across the world. Polak and
Kocurek (2007) argue that the objective of cash management is to boost liquidity, control
cash flows and maximise the value of funds while reducing their cost. From an
inventory management perspective, Kanet (1984) explores the theories of successful
inventory management, inventory control and developments in inventory management.
Skolnik (2007) shows that reduced inventory requirements are mechanisms for
increasing cash balances. Carpenter et al. (1994) examine the link between inventory and
QRFM internal financing and reveal that changes in inventory management can be a source of
funding. The debt management literature emphasises long-term financial management,
6,3 short-term debt management, the trade-off theory and the pecking order theory.
Asselbergh (1999) provides numerous motives for managers to use accounts receivable
(pricing, operating, financing, tax-based and transaction). What is apparent from these
studies is that they do not provide any indication as to what measures should be taken
334 by working capital managers during a financial crisis.
At the Working Capital Management Forum, which was held in London during
the period 23-24 October 2008, a question was raised as to whether the crisis and
consequent recession would lead to a fundamental rethinking of how to manage
working capital (Liddell, 2008). One of the participants in the forum declared that
“working capital management may always have been an issue to some extent, but
it’s never been a priority”, arguing that this would change as a result of the crisis. In
a report prepared by KPMG (2010) on working capital management, it is stated that
“companies around the world are placing more emphasis on cash and working
capital as they tackle the ongoing credit crunch”. The report is based on a survey
asking questions about challenges in relation to cash management and how often
the underlying firm prepares cash flow forecasts. Kesimli and Gunay (2011) examine
the impact of the global financial crisis on the working capital of Turkish firms.
Their results show that the most affected indicator was the receivables turnover
ratio. They reach the conclusion that “companies which manage their working
capital optimally during times of recession come out stronger after the recession
period”. The studies examining the relation between working capital management
and the global financial crisis reach two conclusions:
(1) firms with sound working capital management practices fared better during the
crisis than others; and
(2) the crisis has led to changes in working capital management practices.

It is these propositions that we want to examine in this study by surveying the views of
corporate treasurers in Australia.
Kahneman and Tversky (1979) developed prospect theories and other explanations for
human behavioural biases involving anchoring, representativeness and loss aversion bias.
Hackbarth (2004) shows that theoretically overoptimistic and overconfident managers tend
to choose higher debt levels and issue new debt more often. Oliver (2005) documents the
empirical relation between capital structure and management confidence and finds that
management confidence is highly significant in explaining firm financing decisions. He also
supports the theoretical argument of the overconfidence bias. Miller and Ross (1975),
Zuckerman (1979) and Babcock and Loewenstein (1997) observe that self-serving bias
occurs when people attribute their successes to internal or personal factors but blame their
failures on external factors, which are beyond their control. The current trend in research is
towards applying behavioural–psychological aspects to different areas in finance, and this
is why another objective of this paper is to find out if corporate treasurers are prone to
behavioural biases.

Questionnaire design
One of the goals of the Australian Centre for Financial Studies (ACFS) is to bridge the
gap[2] between academic and industry research. In 2007, the ACFS organised a meeting
for academics in Melbourne with the CEO of the Finance and Treasury Association Working capital
(FTA), James Hewton, who discussed the need for research in working capital
management and explained the lack of interest of academics in this area. In an effort to
management
boost research in this field, the FTA proposed to offer assistance to researchers in the
field. As a result, the staff and members of the FTA (predominantly the corporate
treasurers of large firms) assisted this research by explaining different practices in
working capital management. The results reported in this study are based on a survey 335
of 1,784 Australian listed companies and 237 FTA members[3].
The questionnaire was designed following Belt and Smith (1991) and Graham and
Harvey (2001) – it is in line with the definition of working capital management presented
earlier. We conducted audiotaped interviews with working capital managers to ensure
that the academic literature is up to date with the prevailing industry practices. Formal
interviews of corporate treasurers were conducted from March to May 2008 in an
attempt to bridge the gap between academia and practice. Before each interview, a cover
letter and a plain language statement were sent to the participants to explain the
objectives of the interview as well as the rights, risks and benefits of the participants.
During the interviews, participants were required to answer a maximum of 12 questions
in certain areas of working capital management as firms do not necessarily use all of the
components.
The duration of the interview, which was audiotaped, was approximately one hour.
Participants had the right to request that taping cease at any stage during the interview
and they could opt not to answer any question. However, the first interviews went
beyond one hour, as there were so many new concepts to learn (the longest interview
lasted four hours). Some participants preferred to conduct the interview in a quiet room,
while others preferred the interviews to be conducted over lunch. The participants were
told that the responses would be anonymous and that they would not be identified at any
stage of the research. This agreement was made with the participants, as they did not
want to release their business strategies to the general public. There were no perceived
risks outside the participants’ normal day-to-day activities. Participants also had the
right to withdraw from the exercise at any time without prejudice and to not answer any
question at any time.
A maximum of 20 FTA[4] corporate treasurers were targeted as interviewees, but
only ten were interviewed in the end. Considerable knowledge about modern working
capital management practices and techniques was accumulated from the initial
interviews. However, after eight interviews, it was difficult to obtain new material, as
there were duplications. After ten interviews, no major value was added and we decided
to stop conducting interviews. Using the literature review and the information gathered
from interviews, 29 questions were written and sent to working capital managers by
post and email in March 2009. The targeted managers were given the opportunity to
complete the survey online while follow-up emails were used to boost participation.
The questionnaire consists of both closed-ended and open-ended questions. The
questions deal with various issues such as the following:
• whether working capital management changed as a result of the crisis and if so
how it has changed;
• whether the crisis has changed the management of the individual components of
working capital;
QRFM • the extent to which the crisis is blamed for the poor performance of the underlying
firm (that is, whether working capital managers exhibit self-serving bias); and
6,3
• whether or not Australian working capital managers exhibit behavioural biases.
The specific questions can be found in the Appendix.

We received 150 questionnaires by post while 23 questionnaires were completed online.

336 Of the 173 respondents, 53 refused to participate in the survey, thus the net number of
participants was 120. The response rate is 8.6 per cent if we consider the number of
respondents to be 173. If we exclude the respondents who refused to participate, the
response rate is 5.9 per cent. In both cases the response rate is close to the norm. Alreck
and Settle (1985) suggest that the response rate for mail surveys typically ranges
between 5 and 10 per cent.
Figure 1 displays the characteristics of the participants with respect to the sectors to
which their firms belong, gender, whether their firms are listed, whether their main
markets are in Australia or overseas and whether their firms have credit ratings. There
are ten specific sectors as well as “others”. Materials, industrials, financials and energy
are the four dominant industries in our sample. The participants are predominantly
males from listed companies that sell their products mainly in Australia. Based on
annual revenue, respondents were classified as belonging to two groups of firms: large
firms and small firms. Firms with annual revenue greater than $100 million are
classified as large firms[5] (around one-third of the companies fall into that category).
Most of the participating firms do not have credit ratings[6].

Results
The results are analysed in terms of the percentages of responses to the questions, the
average scores assigned to items that are not mutually exclusive and the most common
responses to open-ended questions. A thorough discussion based on various responses
to open-ended questions is not undertaken due to space constraints. In this sense, it is
unfortunate that we could not follow the insights of Coleman et al. (2010) and Coleman
and Pinder (2010) who emphasise the benefit of exploiting the diversity of responses to
open-ended questions.

The impact of the crisis on working capital management

The participants, all Australian working capital managers, were asked an open-ended
question to find out if their working capital management practices changed in the
aftermath of the global financial crisis. The results of our survey suggest the adoption
rate for moderate, aggressive and conservative working capital management policies
are 35, 13 and 52 per, cent respectively. The results show that around 51 per cent of the
participants changed their working capital management practices. They took a
conservative approach, in that they became more risk averse. These firms tended to
tighten credit controls, reviewed their working capital policies more frequently and,
simultaneously, improved the forecasting and monitoring systems.
On the basis of the responses, we can conclude that firms changed their working
capital management by maintaining liquidity, focussing on the preservation of cash and
by reducing cash conversion cycles. They also reduced inventory and debt with the
intention of keeping additional funding buffers. Furthermore, they tightened credit
controls by focusing on the credit worthiness of counterparties. In Figure 2, the average
 Sectors Working capital
Consumer Discretionary
Consumer Staples
2%
management
5%

Others
28% Energy
12%
Utilities
4% Financials 337
10%
Telecommunication Services
1%
Health Care
4%

Information Technology Industrials

3% 13%
Materials
18%

Gender Listing
Female
8% Unlisted
17%

Listed
83%
Male
92%

Main Markets Credit Rating

Yes
Overseas 26%
17%

Australia Figure 1.
83% No Characteristics of
74% participants (%)

ratio of working capital to revenue for Australian listed companies is shown to have
risen significantly in 2008[7]. The participants provided an additional piece of
information concerning retrenchment of capital expenditure[8].
Profitability data were collected for each firm as respondents were asked to nominate
the state of their company. Our descriptive statistics show that 13 per cent of the firms
QRFM 600

6,3
500

400

338
300

200

100

0
2000 2002 2004 2006 2008 2010

Figure 2. −100
The ratio of working
capital to revenue
−200

underperformed, 40 per cent were at industry average, 43 per cent had strong financial
performance and 4 per cent were at outstanding levels. Most underperforming firms
changed their working capital practices after the crisis. In particular, these firms
restricted their spending and paid more attention to details pertaining to credit risk. In
contrast, the majority of the outstanding firms did not alter their working capital
practices. One conclusion that can be drawn from these two observations is that extreme
losers have a higher tendency (than underperforming firms) to alter their working
capital practices after a crisis than extreme winners (firms with outstanding
performance). Half of the firms with average industry performance did not alter their
working capital practices, whilst the remaining firms reduced their spending, preserved
cash and adopted conservative working capital practices.

The importance of cash

The participants were asked to comment on how cash-level arrangements were altered
as a result of the crisis. The survey results indicate that around 21 per cent of the
participants increased cash holdings, while 34 per cent reduced cash. Interestingly,
nearly half of the participants did not alter their cash management practices. Consistent
with the motto “cash is king”, we observe that a fraction of working capital managers
adopted a conservative approach by preserving cash. Firms that reduced their cash
holdings, and possibly firms that maintained cash levels, could have been focussing on
paying off existing debt. Furthermore, firms changed their saving behaviour during the
crisis, and many of them faced financial distress during the crisis.
Another interesting finding is that firms preferred to deposit their cash with the big
four banks to minimise the risk of loss as a result of potential bank failure. A total of
34-52 per cent of respondents diversify bank transactions. Although it is easier to
maintain a good relationship with a single bank, Australian firms tend to foster
relationships with different banks for the sake of risk diversification. Firms diversify Working capital
bank transactions to enjoy the benefits that different banks have to offer. Some of the
participants made the point that they feared that their bank will disappear over the crisis
management
period.
Twelve methods are evaluated in this survey under cash management – they are
listed under Question 9 in the Appendix. Soenen (1986) documented the importance of
centralization of cash management decisions, diversification of banks and streamlining 339
bank relationships – our results show that these approaches remain essential over time.
Our interactions with the practitioners led us to investigate the remaining nine methods
such as tendering for banking services and meeting payments in a timely manner. Firms
can tender for bank services when they have particular banking needs – for instance, if
they need a global banking passport, technological innovation or efficient solutions.
With a tender for bank services, firms can negotiate for:
• charges depending on transaction volume and concentration;
• the transaction method; and
• the fee.

Firms can evaluate their tender service by clarifying fee structure and transaction
descriptions, comparing charges across transaction types and validating their costing
strategies with banks. Firms are entitled to seek clarification when they think a
particular fee is too high or out of alignment with other quotations.
One of the corporate treasurers discussed the situation where working capital
managers do not take advantage of their payable terms. If they have 60 days to pay for
an invoice, Australian managers generally pay well in advance – around 30 days. This
practice can be regarded as inefficiency in the financing side in terms of opportunity
costs. The explanation suggested for this behaviour is that managers adopt a principle
of meeting their payments in a timely manner. In these particular circumstances, the
invoices are small in value and managers fear the penalties associated with late
payments, or it is simply a firm’s policy to pay within its internal time frame. It should
be noted that this survey was conducted as financial markets was recovering from the
GFC when pressure mounted on corporate treasurers to adopt preventive measures. We
observed that Australian corporate treasurers ended up putting a lot of emphasis on
centralising their cash, pay on time and have policies on key liquidity parameters.
Tsamenyi and Skliarova (2005) argue that the banking and economic environment,
the efficiency of the financial system, the inflation rate, and market regulation influence
cash management practices. During our interviews, we gathered that some working
capital managers were asked to generate funds to finance the purchase of security
equipment after the September 11 terrorist attacks. In a similar manner, we observed
other factors (such as exchange rates, inflation, liquidity on security markets,
technological advances and market regulations) affect the decision of corporate
treasurers when it comes to cash management practices. Responses to Question 10
revealed that the economic environment, financial/banking environment, efficient
financial systems and interest rates are important in the sense that the proportions of
respondents emphasising these factors turned out to be statistically significant.
The results are more pronounced for larger firms. For instance, large firms are more
likely to manage cash through netting, minimising float, setting aside emergency
QRFM liquidity reserves and adopting forecasting techniques for cash management. Large
firms attach higher ratings to factors such as interest rates, exchange rates, efficient
6,3 financial systems, technological advances, financial/banking environment and the
pecking order theory. They prefer bonds to term loans. Compared to small firms, large
firms prefer the use of accounts receivable to cash.

340 Inventory levels

Not many responses to the open-ended question on inventory were received. However,
out of the 51 per cent of the participants who changed working capital practices, around
30 per cent (15 per cent of the total) indicated that they introduced changes to inventory
management. Their goal was to tighten inventory control systems by reducing
inventory levels – another way of minimising risk during the crisis. Firms reduced the
time over which inventory was held, presumably in an effort to reduce debt. In Figure 3
it is shown that the ratio of inventory to revenue (as reported by FinAnalysis for
Australian listed companies) declined in 2008 and 2009 from the 2007 level.
In the area of inventory management, we explore whether firms use material
requirement planning, sales forecasting, just-in-time, economic order quantity,
economic production quantity models, an enterprise resource planning system or
supply chain management. Our results show that sales forecasting is the most
important factor. Sales of a firm tend to fluctuate due to seasonality, the economic
environment and other factors. Therefore, accurate sales forecasting is vital for capital
budgeting, production schedules and even the company’s future direction. Generally
speaking, a sales forecast is a prediction based on previous sales history, which is
relatively simple to achieve. Firms can simply use a Microsoft Excel spreadsheet to
predict sales or they can choose more complex software that takes into account
comprehensive factors. We also observe preference for computerised control systems.

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5
Figure 3.
The ratio of inventory to
0.0
revenue
2000 2002 2004 2006 2008 2010
Credit facilities Working capital
The concept of risk management within working capital management is relatively new
as risk management, arguably, has been recently accepted as a fifth arm of working
management
capital management. We explore how cash and liquidity risk, operational risk, foreign
exchange risk, interest rate risk, credit risk and political risk affect working capital
management. The results indicate that four risks are important in the sense of producing
statistically significant proportions of respondents: cash and liquidity risk, operational 341
risk, credit risk and interest rate risk. Liquidity risk is perceived as the most important
risk in our results. This is consistent with the observed behaviour in the post-GFC era as
firms try to maintain a decent liquidity position so that they did not fall into the
insolvent or financial distress firm category. Operational risk is the risk of any failure in
the process of conducting business – hence, minimising this risk enhances customer
satisfaction. The high rating on operational risk shows that conducting business in an
efficient way during a crisis is vital for a firm’s survival. A major lesson learned during
the crisis is to deal with parties that have high credit ratings. Consequently, most
Australian firms were on the alert and took credit risk seriously. According to Smith and
Thompson (2007), credit risk is critical to a company’s debt policies. During the crisis,
many large corporations and even countries had their credit ratings downgraded, and
many firms were either in financial distress or insolvent. Banks and other financial
institutions would only provide additional loans after a thorough analysis of a
company’s credit risk.
A lesson that has been learned from the global financial crisis is that liquidity risk
and credit risk should not be ignored[9]. Australian firms understood the implication of
these two risks, since they managed their accounts receivable with scrutiny as the
results of the survey indicate. They considered the potential default risk of their debtors
prior to providing sales on credit. Regular credit worthiness assessments and the
requirement of bank guarantees were also introduced to enhance credit control. To
avoid bad debts, firms followed up late-paying customers more promptly and hired
collection agencies to reduce outstanding sales. They also shortened credit terms and
offered greater cash discounts to shorten the conversion cycle.

The credit crunch

We investigate the importance of 12 factors in debt management and observe that half
of them are associated with statistically significant results: financial flexibility, the
volatility of earnings and cash flows, the cost of issuing debt, the potential cost of
bankruptcy, diversification of debt and the tax advantage of interest deductibility.
Graham and Harvey (2001) indicate that the most important item affecting corporate
debt decisions in the USA is management’s desire for financial flexibility. The results of
our survey show that financial flexibility is also at the top of the list of factors affecting
debt decisions in Australia. Around 84 per cent of the respondents agree with the
proposition that financial flexibility is important. This shows that firms must balance
their debt obligations, solvency and liquidity before issuing any new debt. For example,
a firm with high debt and interest obligations with weak solvency and liquidity is no
longer capable of issuing new debt. It can be argued that the GFC reinforced this view
within the industry (note that we do not directly test for the effect of the GFC on financial
flexibility). Volatility of earnings and cash flows is the second most important item, as
around 75 per cent of the respondents indicate that this factor is of great importance.
QRFM According to the trade-off theory, firms reduce their debt when the probability of
financial distress or bankruptcy is high. Our results show that corporate treasurers are
6,3 concerned about the volatility of earnings or cash flows, which is consistent with the
trade-off theory. Another piece of evidence that supports the trade-off theory is that
Australian managers view the potential cost of financial distress or bankruptcy as a
vital indicator.
342 The participants indicated that they were conservative with respect to debt decisions
during the crisis. Because less borrowing was available, firms had to become more
creative in finding new avenues to raise debt. Some firms changed their funding
structures by shifting from short- to long-term debt. Some firms had no short-term plan
to raise capital, as it was too difficult to obtain funding. The difficulty of raising capital
makes it critical to implement working capital commitments. Most firms reduced capital
expenditure in their drive to boost return on investment. They tended to enhance their
relationship with banks, had to renegotiate their agreements and experienced
difficulties in extending their maturity profiles[10].

Behavioural biases
Based on the definition of Miller and Ross (1975), two questions (Questions 21 and 26)
were used to identify self-serving bias. To increase the accuracy of the survey, the two
questions were spread apart so that respondents do not suspect our intention of
measuring bias. Respondents were asked to rate the extent to which they blame their
own financial policy and external factors when their firm is in financial distress where
external factors were proxied by the economic environment. If a respondent selects 3 or
4 for the economic environment when their firm is in financial distress and 3 or 4 for their
own financial policy in times of good financial performance, the respondent is classified
as exhibiting self-serving bias. Conversely, if respondents rate 0, 1 or 2 under the above
situations, we conclude that they are not prone to the self-serving bias.
Kahneman and Tversky (1979) use prospect theory to explain the tendency of people
to prefer avoiding losses to acquiring gains, demonstrating that for the same amount of
losses and gains, people tend to feel the pain of losses more deeply than the happiness of
gains. Questions 24 and 28 are two matched questions about gains and losses where
respondents are asked to indicate how pleased or upset they would be if they gained or
lost a certain amount of money. When the happiness incurred in each winning scenario
is less than the pain for the corresponding loss scenario, we conclude that participants
exhibit loss aversion bias.
Figure 4 displays the percentages of participants exhibiting four kinds of
behavioural biases: overconfidence, self-serving bias, anchoring and representativeness
bias and loss aversion bias. More than 40 per cent of the participants exhibit
overconfidence, 30 per cent appear to have self-serving bias and 20 per cent have
anchoring and/or loss aversion bias. With respect to self-serving bias, for example, the
participants were asked how much of their financial performance was attributed to
external factors. Following Miller and Ross (1975), a respondent can be described as
exhibiting self-serving bias if they select 3 or 4 when attributing performance in bad
times to external factors.
The attitude of taking the credit for good performance while blaming others or
external factors for bad performance is prevalent, particularly in the banking industry.
The Economist (2012) describes self-serving bias sarcastically as follows: “success is
 Working capital
management
Overconfidence

343
Self-serving bias

Anchoring and
representativeness bias

Loss aversion bias

Figure 4.
Participants exhibiting
behavioural biases (%)
0 5 10 15 20 25 30 35 40 45

down to my genius; failure is caused by someone else”. When a bank does well “the
bosses are responsible for it all with their strategic cunning and inspiring leadership”,
but when a bank goes down the same bosses “were never at the scene of the crime”, “they
did not attend the crucial meeting, read the vital memo or open the incriminating email”
and “they have a remarkably faulty memory”.

The importance of risk management

Participants were asked about the key value metrics they used for working capital
management – they responded by choosing one or more of the following: net working
capital, risk management, return on investment, cash conversion cycle, cost of capital
and benchmarking against competition. The results displayed in Figure 5 where the
percentages are calculated as the number of participants using the underlying metrics
(indicated by ticking the appropriate boxes) divided by the total number of participants.
It is not surprising to observe that risk management is the second most commonly used
metric (after net working capital), as this survey was carried out around the time of the
crisis. The majority of the participants (about 60 per cent) declared their use of net
working capital as a metric, whereas only a minority (7 per cent) used benchmarking
against competition[11].
Firms face various risks (such as liquidity risk, credit risk, market risk,
operational risk and political risk) in their day-to-day operations, which means that
efficient risk management is vital for the survival of a firm during a crisis. Figure 6
shows the importance assigned by working capital managers (the participants) to
various risk types in the aftermath of the global financial crisis[12]. The most
QRFM
6,3 Net working capital

Risk management

344
Return on investment

Cash conversion cycle

Cost of capital

Benchmarking against
Figure 5. competition
Metrics used by working
capital managers
0% 10% 20% 30% 40% 50% 60% 70%

Figure 6.
0
The types of risk facing Political risk Foreign exchange Interest rate risk Credit risk Operational risk Cash and liquidity
working capital risk risk
managers* Notes: * 0: not important; 4: extremely important
important kind of risk turned out to be cash and liquidity risk, followed by Working capital
operational risk. It is noteworthy, however, that liquidity risk is typically classified
under operational risk. It is also shown that working capital managers were least
management
concerned about political risk.

Macroeconomic indicators
Perhaps it is useful at this stage to see what actually happened to the macroeconomic 345
indicators that relate closely to working capital management. Our choice of a
macroeconomic indicator falls on the claims of the Australian commercial banking
system on the private sector because it is one of the most relevant variables to working
capital management[13]. Figure 7 shows the growth rate of claims on the private sector
during the period falling between the fourth quarter of 2007 and the fourth quarter of
2011[14]. The declining trend of the growth rate is apparent – it has a straightforward
implication for working capital management.
Because banks have become more cautious about lending to the private sector, and as
borrowing from banks is a prime source of liquidity for private-sector firms, this trend
must have forced a change in working capital management practices. This proposition
re-enforces the point made earlier about the credit crunch and changes in the funding
structure. It is also in line with the proposition put forward by Bedell (2009) that the
global financial crisis has made working capital management particularly important
because of constrained lending by banks.

Conclusion
In this study, we use survey evidence to document the impact of the global financial
crisis on working capital management. The analysis focuses on five elements of
6

Figure 7.
Growth rate of claims on
0
the private sector
2007Q4 2008Q2 2008Q4 2009Q2 2009Q4 2010Q2 2010Q4 2011Q2 2011Q4
QRFM working capital management: cash, inventory, accounts receivable, debt and risk. The
literature shows that risk management is the most important lesson learned from
6,3 the crisis. Consistent with the literature, most participants in our survey emphasised the
importance of liquidity and credit risk control. They also commented on policy changes
in detail with respect to each of these elements.
The main findings can be summarised as follow. First, more than half of the
346 participants changed their working capital management by adopting conservative
policies in terms of tightening credit controls, increasing the frequency of reviewing
their working capital policies and improving their monitoring systems. Second, in an
effort to maintain liquidity, firms tended to reduce expenditure and inventory to
preserve cash while attempting to reduce debt. Third, firms focussed on risk control and
on shortening the cash conversion cycle. Finally, working capital managers exhibited
some behavioural biases.

Notes
1. Leading and lagging is a practice whereby managers expedite their receipts (leading) and
delay their payments (lagging).
2. We bridge the gap between Belt and Smith (1991) and Graham and Harvey (2001) and the
working capital practices in 2007.
3. We targeted all Australian companies listed on the stock exchange and visited their official
websites to collect the postal addresses of their corporate treasurers (or equivalent). The
questionnaires were addressed to individuals in that job description for all the listed
companies.
4. The FTA network provided a natural and good source of information as members are
generally forthcoming and willing to engage with the academic community.
5. Other proxies for size are number of employees, listed firms and companies with credit
ratings.
6. One explanation for why most firms do not have credit ratings is the cost of obtaining ratings.
Now that the GFC has revealed flaws in the credit ratings produced by the three major credit
rating agencies, it must be felt that credit ratings are not worthwhile in terms of costs and
benefits.
7. The data were obtained from FinAnalysis (www.aspectfinancial.com.au/af/finhome?xtm-
licensee⫽finanalysis).
8. This should be taken to imply that capital expenditure is a component of working capital or
that it falls under the jurisdiction of working capital managers.
9. Evidence on risk management practices will be provided later.
10. Evidence on the declining willingness of banks to lend to private-sector firms will be
presented later.
11. It must be made clear that the metrics are not mutually exclusive. The 60 per cent assigned to
net working capital means that 60 per cent of the participants ticked the box corresponding to
this metric. Any of these participants would have ticked at least one more box.
12. The importance assigned to each risk type is measured in terms of a 0-4 Likert scale. The list
of risks facing a firm is not meant to be exhaustive. Interest rate risk and foreign exchange
risk are two kinds of market risk.
13. Claims on the private sector are the outstanding loans extended by commercial banks to Working capital
private enterprises.
management
14. The relevant data were obtained from the IMF’s International Financial Statistics.

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Appendix Working capital
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Figure A1.
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Figure A1.
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Figure A1.

Corresponding author
Vikash Ramiah can be contacted at: vikash.ramiah@rmit.edu.au

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