COMPARING WORKING CAPITAL PRACTICES IN CANADA, US AND AUSTRALIA (BASED ON ARTICLE)

Presented by :Rupesh Nyaupane.MBA.

INTRODUCTION

Based on management of working capital in an aggregate.

Four surveys within two decades in three countries were done and ended up with 18 questions.

Cash equivalents, A/R , inventory , Account and Notes payable and management of working capital were some variables undertaken in study.

Surveys in Brief

1st survey(Smith and Sell) Conducted in 1978 with 35 questions 653 sample from largest US industrials 210 were usable with 32.2% response

rate Found large difference among

responding firm in terms of formality of working capital policies.

Contd…

2nd survey replicated and done by Belt and Smith in 1988.

38 questions,448 samples ,105 usable response and 23.4 % response rate.

Comparing we found more formal and sophisticated current assets and liabilities management.

Contd..

3rd survey was done by Belt and Smith in Australia.

Conducted in 1989 Sample of 144 firms , 39 usable response and

27.1 % response rate. 4th survey was done in 1994 on Canadian firm. Sample of 350 firms between $500000 and $5

million and those with 10 to 500 employees. 57 usable response and 15.8% response rate.

Working capital policy

In Canada

Half of the respondents in all four surveys indicated their survey were reviewed whenever necessary rather than on the regular basis.

Working capital policy

Percentage

Formal working capital policy

7%

Cautious policy 28.5%

Aggressive policy 10.2%

Cash and cash equivalent

Subjective judgment and establish guidelines were used for analysis.

Highest ranking in “buy and hold to maturity.” Half of the Canadian firm prepare cash budget monthly. Large proportion of US and Australian firm on daily basis. Small Canadian firm do not need to budget daily.

Subjective judgment Established Guidelines

76% Canadian firms No report in Canada40% in Australia and US 20% - 30% used

established guidelines.

A/R and Inventory

Little difference in how A/R is measured in three nations.In sequential credit analysis and credit scoring Canadian firms are more sophisticated.

In case of replenishing inventory techniques were far more likely to be ad hoc decision for Canadian firms.

US and Australia use computerized control system.

Accounts and Notes Payable

Annual cost of trade credit

All reported Zero cost. Cost of trade credit in Canada is less than Australia and US. Half of the Canadian firm always take cash discount from

trade suppliers and 11% never take discounts. (90%)US,(75%)Australia and(22.6%)Canada i.e. collateral is

never provided for their working capital loans.

Firms of Nation PercentageUS 30%Australian 10%Canadian 40%

Managing working capital

2/3 of the respondents always included working capital considerations in their capital budgeting.

1/3 of all responding firms uses relevant interest rate.

WACC was used for making decision by 40% Australian and US firms and 19% of Canadian firms.

40% stated hurdle rate not needed in making decisions about working capital accounts.

Conclusion

When 1st survey was replicated after a decade in 1988 we found more formal and sophisticated current assets and liabilities management.

US was better in inventory, credit collection and marketable securities management than Australia.

Highest ranking was given to “ buy and hold to maturity “ in case of cash and marketable securities.

Similarly when asked to rank variables considered in purchasing inventory , result was common in all four surveys and ranked “Availability “ highest.

In this study based on different parameters undertaken every nation firms were good in their own than others.

Recommendation

Firstly, it would be desirable in future surveys to continue to ask similar questions in order to see how practices change over time.

Secondly, survey could be extended to other countries both English speaking and non English speaking countries.

Lastly, due to rapid spread of computers and electronic communication have changed there is need of more questions added in the survey paper.

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