Working Capital Management and Earnings Management Methods

The study analyzes the relationship between the main indicator of working capital management: the financial cycle and two indicators that reflect the effectiveness of management - profitability and liquidity. Moreover, the influence of the financial cycle of both the complex indicator and its components separately is considered: the period of accounts receivable turnover, the accounts payable turnover period and the inventory turnover period. A study is being conducted of 304 companies listed on the American stock exchange and included in the MSCI index. The studied sample includes companies of medium and large capitalization. The specifics of working capital management is studied for eight different industries in different economic periods. Two periods are considered: the global economic crisis of 2008 and the non-crisis period. This review is conducted in order to find out if there is a need for companies to change their working capital management policies depending on the economic period in order to increase liquidity and profitability. The results of the study lead to the following conclusions: companies included in the MSCI index, with a positive financial cycle, in order to increase profitability, must strive to reduce their financial cycle, and with a negative one, to increase the financial cycle. These results lead to the conclusion that it is necessary to reduce the financial cycle to zero. The work revealed a direct statistically significant relationship between the financial cycle and liquidity of the company. A positive correlation was found between profitability and liquidity, but it was noted that the correlation would be positive until a certain point, by going over which, companies received a negative correlation between solvency and profitability.  Moreover, the study found that the size of a company negatively affects both profitability and liquidity. The work provides industry analysis, which allows us to conclude that the industry significantly affects the liquidity of the company, but the impact on profitability is observed only in two sectors. Keywords: liquidity, profitability, working capital management, financial cycle, inventory turnover period, receivables turnover period, accounts payable turnover period, return on assets, return on operating assets, gross operating profit, current liquidity.