The Corerlation Study Between Working Capital Management And The Capacity Of Creating Cash Flow

Working capital management is the core content of short-term financialmanagement, and the enterprise’s operating activities run with the working capital’scontinuous cycle and constant flow. That is, the smooth operation of working capitalmanagement is the important premise of the enterprise’s survival and development. Theeffective management of working capital is the basis of coordination in the enterpriseprocess and the important guarantee of enterprise processes’ running efficiency. Underthe condition of the market economy, all kinds of competition is more and more intensefrom the product market to the capital market, and the enterprise’s capital profitabilityin a certain period depends mainly on its working capital management level. In themodern financial theory, the view that the enterprise’s value depends on the presentvalue of future cash flows has gained general recognition. If there is no operatingactivities’ net cash flow to support the enterprise operation, no amount of revenue andprofit is difficult to achieve the development of the enterprise. Besides, the revenue andprofit can’t accurately reflect the real performance and value of the enterprise. Onlywith plenty of operating activities’ net cash flow, the enterprise has the cash to invest inmore profitable projects and repay maturing debt in a timely manner. It is clearly visiblethat the Capacity of creating cash flow is crucial for the sustainable development andeven the survival of an enterprise. Especially in the initial development period ofStrategic Emerging Industries, enterprises need large amounts of money into researchand development expenditures, therefore, the cash flow of production and operation isof great importance. As one kind of Strategic Emerging Industries, the listed companiesof High-end Equipment Manufacturing Industry, of course, also need to strengthen thecapacity of creating cash flow of the daily business activities. So, what is the correlationbetween the working capital management and the capacity of creating cash flow in the listed companies of High-end Equipment Manufacturing Industry? That is preciselywhat the paper attempts to focus on.From this perspective that enterprise value is equal to net present value of theexpected cash flow in future, this paper puts forward the capacity of creating cash flowto measure the enterprise value. In addition, this paper adopt conversion cycle ofworking capital on behalf of the efficiency of working capital management, adoptproportion of working capital on behalf of working capital investment policy, and adoptproportion of short-term financial liabilities on behalf of working capital financingpolicy. On the basis of literature research, this article makes an empirical analysis on thecorrelation of efficiency of working capital management, working capital investmentpolicy, working capital financing policy and the capacity of creating cash flow aboutChina’s listed companies of High-end Equipment Manufacturing Industry from2007to2012. The meaning of this study is to get through the pathway from working capitalmanagement to the capacity of creating cash flow and provide reference value for listedcompanies of High-end Equipment Manufacturing Industry. The main researchconclusions and results of this paper are as follows:(1)It is a negative correlationbetween conversion cycle of working capital in operating activities and the capacity ofcreating cash flow. That is to say, it helps to improve the capacity of creating cash flowto speed up the turnover efficiency of working capital. The listed companies of High-end Equipment Manufacturing Industry should pay close attention to working capitalmanagement and start with purchasing channel, manufacture channel and sales channel.In practical terms, the enterprise should strengthen the supplier relationshipmanagement, improve the production process, strengthen the customer relationshipmanagement, and strengthen the cooperative relationship between the enterprise and theexternal contact, so as to realize rational allocation of resources, to improve enterprise’sefficiency of working capital management, and to improve the enterprise’s capacity ofcreating cash flow.(2) The more radical the working capital investment policy is, thestronger the capacity of creating cash flow is. The result of regression analysis showsthe remarkable negative correlation between proportion of working capital and cashreturn on investment capital. Therefore, the enterprise should put more money intolong-term assets which can create more value for the enterprise; this will help theenterprise create more cash flow and then improve the enterprise value.(3) Workingcapital financing policy has no significant effect on the capacity of creating cash flow.According to the empirical results, there is no significant correlation between proportion of short-term financial liabilities and cash return on investment capital; it shows thatdifferent working capital financial channels have no significant impact on theenterprise’s capacity of creating cash flow.