Portfolio Approach to Cash Flow Variability

16 Pages Posted: 24 Jul 2022

See all articles by Nikolay Osadchiy

Nikolay Osadchiy

Emory University - Goizueta Business School

William Schmidt

Cornell University - Samuel Curtis Johnson Graduate School of Management

Jing Wu

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Date Written: July 14, 2022

Abstract

Cash flow variability is driven by operational decisions and has implications for operating performance and valuation. Despite this, and the early influence that operations management had on cash flow management, the prevailing approach to managing cash flow variability is through external capital and financial hedging. We propose customer portfolio management as an operational hedge for reducing cash flow variability, and empirically validate this approach using a large database of customer-supplier relationships. Our analysis indicates that this is achieved by (i) pursuing customers with desirable order patterns that offset the cash flow variability from serving legacy customers and (ii) offering them more lenient trade credit terms, which can further reduce aggregate cash flow variability.

Keywords: Cash flow variability, Working capital, Supply networks, Trade credit

Suggested Citation

Osadchiy, Nikolay and Schmidt, William and Wu, Jing, Portfolio Approach to Cash Flow Variability (July 14, 2022). Available at SSRN: https://ssrn.com/abstract=4162190 or http://dx.doi.org/10.2139/ssrn.4162190

Nikolay Osadchiy

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322
United States

HOME PAGE: http://www.nikolayosadchiy.com

William Schmidt

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Jing Wu (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://www.jingwulab.org

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