Effective and Formalised Strategic Financial Management in Small and Medium-Sized Enterprises - Literature review Example

Running Head: STRATEGIC FINANCIAL MANAGEMENT Strategic Financial Management [Name Of Student] [Name Of Institution] STRATEGIC FINANCIAL MANAGEMENT INTRODUCTION This study investigates how large and small U.K. corporations have responded to challenges during the 1980s and the early 2000s in terms of the types of financial analysis tools they employ. In this paper, I survey research in effective and formalized strategic financial management in small and medium sized enterprises in the UK that relates financial numbers to market measures of systematic equity risk. In my view, this research provides two main findings for financial policy makers. First, earnings variability has historically been the financial variable most strongly related to systematic equity risk. Second, systematic equity risk is positively associated with sources of operating risk (price and quantity variability), operating leverage and financial leverage. Moreover, firms with greater operating risk tend to choose a lower level of financial leverage to yield an acceptable level of systematic equity risk. I discuss the implications of this research for risk disclosure policy, indicating ways that the financial system can evolve to provide better information about earnings variability, sources of operating risk, operating leverage and financial leverage. Specifically, I argue that earnings variability would be better indicated by more extensive fair value financial and by well-considered disaggregation of balance sheet accounts and major accrual estimates. I argue that the elimination of absorption costing in favor of direct costing and better segment reporting would improve the information provided about sources of operating risk and operating leverage. I also indicate various possibilities for future research useful to financial standard setters. LITERATURE REVIEW In this paper, I survey the research in effective and formalised strategic financial management in small and medium sized enterprises in the UK that relates financial numbers to market measures of systematic equity risk (hereafter "risk research"). Optimally, I would like to provide direct implications for the specific risk disclosure issues that currently occupy financial standards setters and securities regulators, such as those posed by derivatives as described by Scholes (1996,284): A whole new system of financial management must be developed. Current financial systems concentrate on static valuations. Swaps, foreign exchange contracts, and other OTC derivatives have no initial value. As a result, they are "off balance sheet." There is no place for them in the current financial world. The economic balance sheets of financial firms and corporations are dynamic. Financial instruments alter the risk characteristics of economic balance sheets and do have value. Regulators can encourage the financial profession to develop a dynamic financial system with a focus on risk exposures -- on how the balance sheet changes in response to various risk exposures such as interest rate movements, currency price movements, and commodity price movements.[1] As will become apparent, however, most risk research has only general (though important) implications for the current risk disclosure debate. A particular limitation is that most risk research was performed in the 1970s, and so employs models of the economic environment and data generated by the financial system being used at that time. In contrast, some recent risk disclosure proposals advocate revolutionary change of the existing financial system into the more dynamic sort envisioned by Scholes (1996), such as the AICPA Special Committee on Financial Reporting's 1994 call for forward-looking and non-financial disclosures, and the SEC's (1997) requirements for disclosures about market risk inherent in derivatives. Accordingly, for the financial policy makers reading this paper, my more modest goal is to discuss the general implications of risk research, focusing on how these implications suggest ways that the existing financial system can evolve to provide more and better information about firm risk. For the financial researchers reading this paper, my goal is to indicate ways that risk research can be extended to address current risk disclosure issues. In this regard, the organizers of the 1997 AAA/FASB Financial Reporting Issues Conference currently intend to devote that conference to risk disclosures. As stated above, I focus on research that relates financial numbers to systematic (non-diversifiable) risk. This focus may limit the implications of this paper for financial policy makers such as the SEC, who appear to want to provide measures of the total risk of the individual assets and liabilities of the firm (with a focus on the downside, especially severe losses). My focus reflects the fact that under standard theories of asset pricing, such as the capital asset pricing model (CAPM), only systematic risks are priced, while idiosyncratic risks are diversified away by risk-averse investors holding appropriately chosen portfolios. Moreover, the diversification of idiosyncratic risk could take place at the firm level; a balance sheet is a portfolio, and the idiosyncratic risks of a firm's assets and liabilities may offset to some extent.[2] In my view, risk research provides two main findings for financial policy makers. First, earnings variability has historically been the financial variable most strongly related to systematic equity risk. Second, systematic equity risk is positively associated with sources of operating risk (price and quantity variability), operating leverage and financial leverage. Moreover, firms with greater operating risk tend to choose a lower level of financial leverage to yield an acceptable level of systematic equity risk. I summarize some of the main implications of each of these findings briefly below. The finding that earnings variability is the financial variable related most strongly to systematic equity risk suggests that improved information about the amount and sources of earnings variability would be useful. This information could include more extensive fair value disclosures and well-considered disaggregation of balance sheet accounts and major accrual estimates. As discussed by Barth and Landsman (1995), if fair values can be measured reliably, then ex post changes in fair values should better reflect the variability of asset and liability values than do valuations based on alternative financial measurement methods such as historical cost. Moreover, if markets function well, then the sum of changes in the fair values of assets and liabilities should approximate the change in the fair value of the firm's equity, and so fair value financial should measure ex post realizations of firm risk well. In this regard, Barth et al. (1995) show empirically that fair value-based earnings are more variable than historical cost-based earnings for banks. Researchers have not yet provided, but could and should provide, direct evidence on whether fair value financial helps in the assessment of risk. Relatedly, well-considered disaggregation of balance sheet accounts and major accrual estimates should better indicate the sources of firms' earnings variability. For example, bank and insurance industry regulators (who are primarily concerned with the "safety and soundness" or "solvency" of their industries) have long required such disaggregated disclosures, the most notable being interest rate gap schedules by type of interest-bearing financial instrument for banks, and loss reserve development schedules by type of policy and year the policy is written for property-casualty insurers. The interest rate gap schedules allow bank regulators to assess banks' ex ante interest rate sensitivity. The loss reserve development schedules allow insurance regulators to determine why loss reserves ex post changed from year-to-year. Interestingly, the SEC has required somewhat more aggregated versions of both these schedules in 10-K filings, but the set of such disclosures could and should be substantially expanded. For example, why are banks not required to disclose allowance for loan loss development schedules by type and year of loan, or insurance companies to disclose their financial instruments' interest rate gap? THE FINANCIAL CULTURES The EC may be one single entity but it contains different countries with different legal and taxation systems, with different educational frameworks and different views on the relationships between accounting, taxation and the law. In Britain the financial accounts look to the shareholders and the financial world, on the continent they are much more for the creditors and the taxation authorities. Britain has a financial culture, dominated by the London Stock Exchange, which a 2001 survey showed had barely fewer listed companies than the combined stock exchanges of Germany, Paris, Madrid, Milan and Amsterdam. Of course, this is not the whole story. The strength of continental economies such as Germany, France and Italy, lies in the number of medium-sized privately owned companies. In British public companies the shareholder is king even if he does not participate actively in ownership and even if that means in practice the dominance of the institutions. One result of this is the existence of a market in corporate control when it comes to takeover bids. Hostile takeovers are recognised as part of the culture and much admired firms such as Hanson and BTR have become masters in the art of such takeovers. Shareholder value is an important concept and companies watch closely their share prices and market ratings. These are linked to strategy and planning--particularly as a result of the corporate governance movement--bonus payments to directors and senior managers. The reported results are critically important and are keenly watched by the market and monitored by companies. There is heavY pressure for transparency in reporting, but the voluntary rules monitored by an immensely powerful financial and accounting establishment also allow for financial engineering and the resulting scandals. The pressure is for short term, reported results, and many commentators link this cult of 'now nowism' to the economic decline of Britain. In my view, the current financial system can be characterized as almost entirely ex post, reporting point estimates of current investment and past performance rather than distributions of possible future values. This characterization applies even to fair value financial. The current financial system provides information about future values mainly in the sense that, in competitive markets where investments yield a normal risk-adjusted return on average, current investment should be related to expected future returns. In contrast, as the quote from Scholes (1996) at the beginning of this paper makes clear, there is no necessary relation between current investment and the spread of the distribution of future values, e.g., a derivative with zero initial value can yield a huge spread. (Of course, there will be a relation when risk is priced.) In this sense, proposals for disclosures of ex ante distributions of future values go well beyond the existing financial system in their forward-looking nature. Implementation of these proposals will require many more estimates and a much higher level of judgment than is typical of the existing financial system. If one believes, as do I, that the comparative advantage of the financial system derives from the verifiability and auditability of the information it provides, then the comparative advantage of the financial system for providing such forward-looking risk disclosures seems questionable. Regardless of whether you agree with this point, it is certainly possible and useful to develop recognition and disclosure rules that better describe current investment and past performance than is currently the case. For example, the FASB's proposal to market-value derivatives on the balance sheet is an example of a movement toward a better description of current balance sheet positions. Similarly, the SEC's requirement that property-casualty insurers disclose the development of the loss reserve over time for insurance written in specific years could be generalized to require disclosures of ex post realizations of risk associated with all major accrual estimates for a firm. Such disclosures would be useful for risk assessment but would not entail revolutionary change of the existing financial system. If revolutionary change in the financial system is to take place, should it be the FASB or the SEC that directs this change? In my view, it is the SEC's comparative advantage as a more powerful and political body to do this, at least over the short term. This view is based, in part, on my inability to imagine how disclosures of ex ante distributions of value could be audited (such disclosures effectively being custom-tailored actuarial estimates, with management likely possessing far superior information to the auditor), thus raising the importance of the SEC's compliance function and ability to provide safe-harbors for such disclosures.[3] This view is also consistent with the AIMR's distinction between financial reporting (the purview of the FASB) and analysis (the purview of the SEC through Section 9.40 of Regulation S-K and Securities Act Releases Nos. 4936, 5520, 6231 regarding the management discussion and analysis in financial reports). Over the longer term, however, it is worth considering whether and how responsibility for the continued development of ex ante risk disclosures could be transferred to the FASB, with its technical and consensus-building skills. The answers to these questions depend, in part, on the answer to the more fundamental question as to whether it is in the comparative advantage of GAAP to provide information about distributions of outcomes in addition to point estimates of value. SURVEY PROCEDURES In order to obtain an accurate view of the corporate decision-making process, it was important that knowledgeable individuals with a broad understanding of the types of financial analysis conducted throughout their firm complete the questionnaire.4 The vice president of finance (27.4%), the assistant treasurer (16.3%), and the treasurer (15.6%) were the most likely to have completed the questionnaire. It is apparent that well-qualified individuals of roughly the same level of corporate authority completed the questionnaire. SYSTEMATIC VERSUS TOTAL FINANCIAL MANAGEMENT Systematic financial management is the portion of the variance of firm returns that is common to the market, and thus cannot be diversified. Total financial management is the variance of firm returns; it includes systematic and idiosyncratic components. The CAPM, which is based on the assumption of perfect markets, states that only systematic financial management should be priced.[4] In actuality, idiosyncratic financial management might be priced if this financial management is not diversified, say due to market imperfections such as non-tradeable human capital or non-maximizing behavior by investors. Most financial management research focuses on systematic financial management for two reasons: (1) the goal of the research is to articulate with finance research employing the CAPM, and (2) systematic financial management is more tractable analytically than is total financial management.[5] This is true even though most financial variables are related more naturally to total financial management than to systematic financial management. For example, even the financial variable associated most strongly with systematic financial management, earnings variability, does not reflect the ability of shareholders to diversify this variability. In contrast, managers of firms, financial standard setters and securities regulators appear to focus on total financial management (with a focus on the downside--especially severe losses), perhaps because some portion of their constituencies cannot or does not diversify. For example, changes in fair values are not decomposed into systematic and unsystematic components under current GAAP.[6] An important implication of this distinction is that firms should not diversify (or hedge) idiosyncratic financial management in the absence of market imperfections. The diminution of the total financial management of the firm from hedging would be value-neutral if costless, and value-diminishing if costly. Bankruptcy costs, taxes, transactions costs in real markets, poorly diversified managers or investors, and other factors can explain hedging. SOURCES OF OPERATING FINANCIAL MANAGEMENT (CONTRIBUTION MARGIN (CO)VARIANCE) VERSUS FINANCIAL MANAGEMENT MULTIPLIERS (LEVERAGE) Firm net income can be decomposed into the portion that is fixed in real terms and the portion that varies in real terms, which I refer to as fixed costs and contribution margin, respectively. This decomposition of net income motivates a distinction between factors that affect the (co)variance of contribution margin, which I call sources of operating financial management, and factors that affect the magnitude of fixed costs, which I call financial management multipliers or, more conventional]y, leverage. Sources of operating financial management include the variability of quantities and prices of outputs and inputs. Individual sources of operating financial management add to equity financial management unless they hedge other sources of operating financial management, such as when a firm with an employee profit sharing plan induces a positive association between the input price for labor and the output price for its goods. Leverage multiplies rather than creates financial management. That is, a firm with no contribution margin (co)variance remains financial managementless regardless of its leverage. More generally, leverage increases equity financial management for a given level of contribution margin (co)variance. Leverage is usually separated into operating and financial components reflecting fixed operating and financing costs. Greater operating leverage increases equity financial management insofar as the choice of larger fixed operating costs drives variable operating cost per unit down and thus any variability of contribution margin up, ceteris paribus. Greater financial leverage increases equity financial management in that it concentrates any variability of firm income in the hands of a smaller ownership base, ceteris paribus. The importance of this distinction for the financial management disclosures debate is mainly that contribution margin (co)variance, operating leverage and financial leverage for a firm should not be viewed as independent. In particular, Mandelker and Rhee (1984) argue that financial leverage is a choice variable that should be chosen to yield an appropriate level of total financial management for the firm. If so, then financial leverage will be negatively correlated with the firm's overall operating financial management (the financial management resulting from the firm's contribution margin (co)variance and operating leverage). Alternatively, Myers (1977) argues that operating leverage and financial leverage should be positively correlated, since firms with more fixed assets (and thus more fixed operating costs) find it easier to issue debt.[7] Myers' (1977) argument naturally does not apply to firms for which operating leverage results from factors other than fixed assets, such as labor contracts. Mandelker and Rhee (1984) provide evidence that operating and financial leverage are negatively correlated for the average firm. Moreover, they find that the correlation between operating and financial leverage is more negative for financial managementier firms. In my view, financial policy makers have not fully recognized the association between sources of operating financial management and financial management multipliers in developing either GAAP or the current financial management disclosure proposals. As noted earlier, various aspects of current GAAP blur sources of operating financial managements with operating leverage, such as the valuation of inventory using absorption costing (mandated under ARB No. 43) and the crudeness of segment disclosures. These aspects of GAAP limit the usefulness of financial numbers in financial management assessment. For example, by capitalizing fixed costs, absorption costing makes the firm's cost structure appear more variable, which lowers the variance of gross margin relative to the variance of true contribution margin, and also makes operating leverage appear lower. Both effects make the firm appear less financial managementy than it is. The distinction between sources of operating financial management and the two types of leverage is critical for understanding the incremental usefulness of potential financial management disclosures. For example, consider the disclosure of the fair value of a take-or-pay contract for a factor of production. In theory, this disclosure could provide information about the variability of factor prices (a source of financial management), about fixed product costs (operating leverage), and about fixed financing costs on the economic liability (financial leverage). By itself, of course, the fair value of the take-or-pay contract would not provide complete information about any of these things. However, the fair value could be supplemented by appropriately chosen disclosures which collectively provide complete information. In this regard, it is already required that firms disclose the minimum payments under take-or-pay contracts for each of the next five years and beyond five years, which provides information about the operating leverage that results from the take-or-pay contract. Thus, the incremental usefulness of the fair value of the contract should be to indicate either the variability of factor prices or the magnitude of the economic liability. SURVEY RESULTS Financial management research typically assumes that estimates of financial management derived from past security return data are not systematically biased. Under this assumption, a regression of noisy but unbiased estimates of financial management on financial variables yields a function which should purge some of the noise from these estimates of financial management. In econometric terms, the financial variables are used as instrumental variables. EARLY, INTUITIVELY-MOTIVATED, EMPIRICAL RESEARCH The earliest paper in this line of research is Beaver et al. (BKS) (1970). Motivated by economic intuition rather than rigorous theory, BKS regress beta on seven financial variables: dividend payout, asset growth, financial leverage, asset size, current ratio, the variance of the earnings-to-beginning of year price ratio (earnings variability), and the coefficient in a regression of the earnings-to-be-ginning of year price ratio on the market earnings-to-beginning of year price ratio (financial beta). Not surprisingly, given the lack of rigorous theory and the fact that the financial variables are correlated, not all of the variables are significant. In their best-fit regression, BKS include only three variables; they find that beta is significantly negatively associated with dividend payout, significantly positively associated with asset growth, and significantly positively associated with earnings variability. Earnings variability is the most significant of the financial variables, even though financial beta is conceptually more analogous to beta. BKS attribute this finding to the fact that financial beta is very noisy (it has four times the variance of beta) and it is highly positively correlated with earnings variability. BKS show that the predicted value of beta from their best-fit regression is a better estimate of future beta than is current beta. BKS thus show that financial variables are useful in estimating financial management. This result motivated a boom in financial management research during most of the first half of 1970s. Financial management research continued to rely on economic intuition rather than rigorous theory, but improved on BKS's methodology in various ways. These methodological improvements include: a) Incorporating additional or different financial measures of financial management. Rosenberg and McKibben (1973) and Lev (1974) include measures of operating leverage, which Rosenberg and McKibben (1973) find to be insignificant and Lev (1974) finds to be significant. Lev and Kunitzky (1974) employ measures of variability in various financial variables (sales, dividends, capital expenditures, current ratio and financial leverage), the first four of which they find to be significantly positively related to beta. Rosenberg and McKibben (1973) and Bildersee (1975) use more extensive sets of financial ratios, including turnover and coverage ratios. Beaver and Manegold (1975) employ various measures of financial beta. b) Incorporating managerial actions. Bildersee (1975) includes dummy variables for the following managerial actions: reductions of common dividends to zero, arrearages on preferred dividends, and corporate diversification. Bildersee (1975) finds these variables to have significance comparable to financial variables. He also finds that the explanatory power of managerial actions and financial variables over beta overlap substantially. c) Incorporating market variables and mean reversion in market measures of financial management. Rosenberg and McKibben (1973) include various market variables such as trading volume, share turnover, share price, stock exchange, dividend yield, earnings-to-price ratio, book-to-market ratio, and estimates of misvaluation based on naive growth forecasts, many of which are significant predictors of beta or total financial management. Rosenberg and McKibben (1973) and Beaver and Manegold (1975) recognize that because market measures of financial management are noisy, the prediction of future financial management should allow for mean reversion from the current level of financial management. Allowing for both market variables and mean reversion in market measures of financial management, Rosenberg and McKibben (1973) still find financial variables to be significant predictors of future financial management. d) Controlling for industry. Lev (1974), Lev and Kunitzky (1974), and Bildersee (1975) find that controlling for industry generally improves their results, presumably because it yields greater homogeneity in the relation between market measures of financial management and financial variables. The major findings are provided in Exhibits 1-5. The percentage of firms in each industry indicating that they frequently use each financial technique is provided as well as an overall or composite percentage for the entire survey sample. The Chi-square level of significance reported indicates whether or not the observed industry differences are statistically significant. In addition, the coefficient of variation (CV) is calculated for the industry utilization rates to indicate their relative degree of variability. Thus, a small coefficient of variation indicates that there is little difference in utilization across industries. While any categorization is somewhat arbitrary, a CV below 30% might be considered low, while a CV above 70% could be considered high. A t-test of mean differences was calculated for the composite usage rates to identify statistically significant differences between the three survey dates: 2000, 2005, and 2001. FUTURES MARKETS Exhibit 4 shows the relative use of the futures markets for hedging input prices (raw material costs), output prices, and foreign exchange. Hedging raw material prices with futures contracts is reported by roughly one-third of the firms, although quite a good deal of industry specific variation is observed as reflected in a large CV of 79%. The two industries most actively involved in hedging input prices are petroleum refining and the food, beverage, and tobacco industry. Obviously not all production inputs or outputs are traded on an established futures exchange as is the case for inputs such as crude oil, wheat, lumber, etc. In terms of hedging output prices, only 18% of the firms frequently use the futures market. Once again petroleum refining is the most active industry. Not surprising, the CV for this technique is also quite large (130%). Globalization of business accelerated during the 2000s. While many U.K. firms felt increased competition from foreign firms, a weak U.K. economy forced many domestic firms to seek markets overseas. Consequently, the cross-border flow of funds increased dramatically as did the need to protect earnings from increasingly volatile currency fluctuations. The survey results indicate that the futures market is used to hedge foreign exchange risk by slightly over half (52%) of the firms. The most active industries are industrial and farm equipment, scientific and photographic equipment, and aerospace firms. The CV for this technique is relative small (38%). The use of the future markets has increased since 2005 for hedging raw material costs and finished product prices, while little change is noted for hedging of foreign currencies. CONCLUSION Some conclusions that can be drawn from the research summarized thus far are: a) Rosenberg and McKibben (1973), probably the most comprehensive of the financial management research studies, finds that earnings variability is the most significant financial variable in explaining financial management, the same finding as the original study by Beaver et al. (1970). This result raises the question of whether fair value financial aids financial management assessment, since Barth et al. (1995) show that fair value financial increases earnings variability. However, researchers have yet to provide direct evidence as to whether the increased variability associated with fair values translates into better financial management assessments. b) Both financial variables and other information are useful in the assessment of financial management. This is to be expected since financial management is an intrinsically ex ante and multi-dimensional concept, while financial variables are intrinsically ex post and constrained by GAAP. It seems unwise to expect financial to be entirely sufficient for financial management assessment. As stated by Bildersee (1975,83), "the systematic use of non-financial schemes to augment an analysis of a firm may enable a more orderly development of financial as the data generated by a firm would no longer be required to be 'all things to all people.'" c) Substantial room remains for additional research. Empirically, these studies find that financial variables do not come close to fully explaining financial management (e.g., financial variables explain 45 percent of the cross-sectional variance of beta in sample and 24 percent of this variance out of sample in Beaver et al. (1970). Theoretically, the research summarized thus far does not use rigorous theory to place structure on the relationship between market measures of financial management and financial variables. This research also does not attempt to remedy even the most apparent limitations of recognized financial variables, such as off-balance sheet financing. These limitations, while partially addressed, exist to date. It should be noted that this research is now quite dated and thus confirmation of past results using more recent data would be valuable. In the UK, too, perceptions are changing. A significant part of industry, particularly manufacturing, is now foreign owned. One senses that the institutions are beginning to take a long-term approach to their shareholdings: perhaps they have no other choice because they own so much of British industry! In the majors, management accounting is merging into financial management and the finance director and controller are reporting as much on non-financial as on financial data. REFERENCES Aggarwal, Raj, 2000, "Corporate Use of Sophisticated Capital Budgeting Techniques: A Strategies Perspective and a Critique of Survey Results," Interfaces (April), 31-34. Aggarwal, Raj, 2003, "Theory and Practice in Finance Education: or Why We Shouldn't Just Ask Them," Financial Practice and Education 3:2 (Fall), 15-18. Gitman, Lawrence G. and Charles E. Maxwell, 2005, "Financial Activities of Major U.S. Firms: Survey and Analysis of Fortune's 1000," Financial Management 14:4 (Winter), 57-65. Kim, Suk and Edward J. Farragher, 2001, "Current Capital Budgeting Practices," Management Accounting 12 (June), 26-31. Klammer, Thomas, 2002, "Empirical Evidence of the Adoption of Sophisticated Capital Budgeting Techniques," The Journal of Business 45:3 (July), 387-402. Klammer, Thomas and Michael C. Walker, 2004, "The Continuing Increase in the Use of Sophisticated Capital Budgeting Techniques," California Management Review 27:1 (Fall), 137-148. Percival, John, 2003," Why Don't We Just Ask Them?," Financial Practice Journal 3:2 (Fall), 9. Petry, Glenn, 2005, "Effective Use of Capital Budgeting Tools," Business Horizons 18:5 (October), 57-65. Moore, James and Alan Reichert, 2003, "An Analysis of the Financial Management Techniques Currently Employed by Large U.S. Corporations," Journal of Business Finance and Accounting 10:4 (Winter), 623-645. Rappaport, Alfred, 2009, "A Critique of Capital Budgeting Questionnaires," Interfaces 9:3 (May), 100-102 Reichert, Alan, James Moore, and Ezra Byler, 2008, "Financial Analysis Among Large U.S. Corporations: Recent Trends and the Impact of the Personal Computer," Journal of Business Finance and Accounting 15:4 (Winter), 469-485. Ross, Marc, 2006, "Capital Budgeting Practices of Twelve Large Manufacturers," Financial Management 15:4 (Winter), 15-22. Scapen, Robert and J. Timothy Sale, 2001, "Performance Measurement and Formal Capital Expenditure Controls in Divisionalized Companies," Journal of Business Finance and Accounting 8:3 (Fall), 389-419. Trahan, Emery A. and Lawrence J. Gitman, 2005, "Bridging the Theory-Practice Gap in Corporate Finance: A Survey of Chief Financial Officers," The Quarterly Review of Finance and Economics 35:1 (Spring), 73-88. Weaver, Samuel C., 2003, "Why Don't We Just Ask Them?," Financial Practice Journal 3:2 (Fall), 9. APPENDIX Exhibit 1. Analysis of Working Capital Techniques (Percentage of Firms by Industry Indicating "Frequent" Use of Various Techniques) Legend for Chart: A - Industry B - 1991 Sample Size C - Project Cash Budget D - Break-even Analysis E - Fin. & Oper. Level F - Source and Uses of Capital A B C D E F Mining, Crude Oil Production 5 100% 40% 80% 100% Food, Beverage, Tobacco 14 86 43 77 79 Textiles, Apparel, Vinyl Floor 6 100 67 83 83 Paper 12 92 36 67 100 Publishing 7 100 17 86 100 Chemicals 17 94 38 69 94 Petroleum Refining 14 100 64 50 93 Rubber & Plastics 3 100 33 100 100 Glass, Concrete, Abrasives 5 80 20 40 100 Metal Manufacturing 8 86 33 71 100 Metal Products Fabrication 5 100 40 60 100 Electric & Appliances 14 100 36 71 62 Shipbuilding, RR, Trans. Equipment 4 100 25 50 67 Scientific & Photographic Equipment 5 80 40 60 80 Motor Vehicles 6 100 40 60 100 Aerospace 4 75 50 100 100 Pharmaceuticals, Soap, Cosmetic 6 100 0 50 83 Office Equipment & Computers 5 100 40 40 100 Industrial & Farm Equipment 11 91 20 64 91 Number of Responses 149 144 145 144 Coefficient of Variation (CV) 9.0 43.5 26.2 13.6 1991 Composite 94.0 37.5[a] 66.9 89.6 1991 Level of Chi-square Significance 0.78 0.73 0.79 0.21 1985 Composite 95.2 46.5 63.8 91.2 1980 Composite 91.9 37.9 59.7 90.0 a Mean difference between 1985 and 1990 is statistically significant at the 0.05 level. Exhibit 2. Analysis of Working Capital Techniques (Percentage of Firms by Industry Indicating "Frequent" Use of Various Techniques)--Continued Cash Security Accounts Inventory Management Portfolio Receivables Management Industry Models Models Models Models Mining, Crude Oil Production 100% 20% 60% 60% Food, Beverage, Tobacco 46 83 43 46 Textiles, Apparel, Vinyl Floor 67 17 67 50 Paper 67 17 67 54 Publishing 33 0 67 33 Chemicals 75 27 67 69 Petroleum Refining 86 31 57 43 Rubber & Plastics 67 33 67 33 Glass, Concrete, Abrasives 60 20 40 60 Metal Manufacturing 83 0 100 50 Metal Products Fabrication 60 0 25 75 Electric & Appliances 86 36 64 79 Shipbuilding, RR, Trans. Equipment 100 33 33 0 Scientific & Photographic Equipment 80 50 50 60 Motor Vehicles 50 0 50 50 Aerospace 100 75 75 100 Pharmaceu- ticals, Soap, Cosmetic 67 0 50 33 Office Equipment & Computers 100 0 80 100 Industrial & Farm Equipment 46 10 55 64 Number of Responses 145 138 143 143 Coefficient of Variation (CV) 28.2 96.7 29.6 49.6 1991 Composite 70.3 20.3 59.4 59.4 1991 Level of Chi-square Significance 0.16 0.207 0.83 0.46 1985 Composite 71.0 23.5 53.8 60.3 1980 Composite 61.7 N.A. 10.1 56.0 Exhibit 3. Analysis of Capital Budgeting Techniques (Percentage of Firms by Industry Indicating "Frequent" Use of Various Techniques) Average Payback NPV IRR NPV or Industry ROR (DCF) 2001 IRR 2001 Mining, Crude Oil Production 50 75 100 100 100 Food, Beverage, Tobacco 62 71 86 70 93 Textiles, Apparel. Vinyl Floor 60 83 83 33 83 Paper 58 75 83 92 92 Publishing 43 57 100 100 100 Chemicals 43 77 88 88 88 Petroleum Refining 36 50 86 93 100 Rubber & Plastics 67 67 100 100 100 Glass, Concrete, Abrasives 40 60 80 100 100 Metal Manufacturing 0 50 88 88 88/ Metal Products Fabrication 40 60 100 100 100 Electric & Appliances 43 50 86 79 86 Shipbuilding, RR. Trans. Equipment 25 25 25 25 25 Scientific & Photographic Equipment 80 60 100 100 100 Motor Vehicles 0 33 50 67 67 Aerospace 75 100 75 100 100 Pharmaceuticals, Soap, Cosmetic 50 67 100 67 100 Office Equipment & Computers 20 40 50 60 80 Industrial & Farm Equipment 36 82 91 82 100 Number of Responses 144 150 150 150 151 Coefficient of Variation (CV) 50.0 29.7 24.7 28.0 20.3 1991 Composite 45.8[a] 63.3[a] 84.7 81.8[b] 90.7[c] 1991 Level of Chi-square Significance 0.27 0.55 0.082 0.018 0.016 1985 Composite 59.3 75.9 82.8 79.6 89.5 1980 Composite 59.1 79.9 68.1 66.4 86.2 a Difference between 1985 and 1991 is statistically significant at the 0.10 level. b Difference between 1980 and 1991 is statistically significant at the 0.05 level. c Difference between 1980 and 1991 is statistically significant at the 0.10 level. Exhibit 4. Use of Futures Markets for Risk Hedging (Percentage of Firms by Industry Indicating "Frequent" Use of Various Techniques in 2005) Industry Raw Output Foreign Material Prices Exchange Mining, Crude Oil Production 20 40 40 Food, Beverage, Tobacco 54 33 46 Textiles, Apparel, Vinyl Floor 33 0 50 Paper 17 8 33 Publishing 0 0 43 Chemicals 44 25 59 Petroleum Refining 79 64 50 Rubber & Plastics 0 0 67 Glass. Concrete. Abrasives 0 0 40 Metal Manufacturing 13 0 13 Metal Products Fabrication 40 25 40 Electric & Appliances 36 14 71 Shipbuilding, RR. Trans. Equipment 25 0 50 Scientific & Photographic Equipment 0 0 80 Motor Vehicles 40 0 17 Aerospace 50 0 75 Pharmaceuticals, Soap, Cosmetic 20 20 67 Office Equipmere & Computers 20 20 60 Industrial & Farm Equipment 20 10 82 Number of Responses 146 143 150 Coefficient of Variation (CV) 79.0 130.2 37.6 1991 Composite 32.2 18.2 52.0 199l Level of Chi-square Significance 0.019 0.008 0.30 1985 Composite 24.4 13.1 51.0 Exhibit 5. Analytical Techniques Used in Project Analysis (Percentage of Firms by Industry Indicating "Frequent" Use of Various Techniques in 2001) Industry Expected Variance Correlation Return of Return of Returns Mining, Crude Oil Production 100 40 50 Food, Beverage, Tobacco 71 15 39 Textiles, Apparel, Vinyl Floor 100 0 67 Paper 75 17 58 Publishing 100 17 33 Chemicals 82 33 40 Petroleum Refining 92 42 25 Rubber & Plastics 67 67 67 Glass, Concrete, Abrasives 60 0 0 Metal Manufacturing 86 17 43 Metal Products Fabrication 80 20 60 Electric & Appliances 71 43 50 Shipbuilding, RR, Trans. Equipment 100 25 50 Scientific & Photographic Equipment 100 20 80 Motor Vehicles 80 20 40 Aerospace 100 0 50 Pharmaceuticals, Soap, Cosmetic 67 0 60 Office Equipment & Computer 80 0 0 Industrial & Farm Equipment 82 0 27 Number of Responses 148 140 140 Coefficient of Variation (CV) 16.0 94.3 47.7 1991 Composite 82.4 21.4 42.9 1991 Level of Chi- square Significance 0.75 0.196 0.480 1985 Composite 88.7 21.2 44.7 Read More