Working Capital and Wine Industry: History
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Teresa Candeias
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Diana Dias

Wine has been produced for thousands of years. The earliest evidence of wine is from ancient China (c. 7000 BC), Armenia (6000 BC), Persia (5000 BC), and Italy (4000 BC). 

  • working capital
  • cash conversion cycle
  • profitability
  • wine companies

1. Introduction

Wine has been produced for thousands of years. The earliest evidence of wine is from ancient China (c. 7000 BC), Armenia (6000 BC), Persia (5000 BC), and Italy (4000 BC). As Old World wine further developed viticulture techniques, Europe would encompass three of the significant wine-producing regions. Today, the five countries with the greatest wine-producing regions are Italy, Spain, France, the United States, and China (Johnson 1989). In fact, in the last decades, wine has become a commonly consumed product, creating trade flows that have an impact both on traditional producing countries and on the so-called New World (Anderson 2019). Balogh and Jámbor (2017) considered that comparative advantage plays an important role in the analysis of international trade flow but is often neglected in empirical studies on agriculture. The findings indicate that Bulgaria, Cyprus, France, Greece, Italy, Portugal, and Spain are the top classified European wine producers in the world market and have greater comparative advantages. Nevertheless, duration and stability tests reveal that those advantages have diminished for the majority of these countries. In regional terms, the wine cluster contributes to economic growth and the continued development of the regions. Larreina and Aguado (2008) argue that the specific characteristics of the Rioja wine cluster may be the cause of its recent performance, in which the wine cluster represents one-fifth of the regional GDP.
Galati et al. (2017) argue that international market success is more frequent among wineries with larger physical and economic size, greater international market experience, and that are managed by owner-entrepreneurs with high levels of education and foreign language proficiency and that develop and implement voluntary certification processes.
Several studies were conducted to assess the determinants of wineries’ profitability. De Salvo et al. (2017) aimed to recognize the core factors of wineries’ profitability specifically in Eastern Europe considering the concurrent influence of climate characteristics, vineyard geographies, winegrowers’ features, and management practices on vineyards’ profitability. This research suggests that climate attributes and human aspects, specifically the educational level of the winegrowers and the form of agriculture experienced, arise as the main determining factors. Bresciani et al. (2016) present the contrasts of economic and financial performance concerning family firms and non-family firms for the wine sector in Italy and France. The results confirm that the family variable is important for accomplishing good performance in economic and financial terms and providing firms with different features. Regarding economic performance, family firms in both countries outperform with respect to return on equity and return on assets, while only Italian non-family firms perform better in earnings before interest and taxes. Concerning financial performance, in Italy and France non-family firms have better performance than family firms in the current ratio and liquidity ratio; in contrast, family firms perform best in the solvency ratio. Dimitropoulos et al. (2019) argue that throughout a period of controlled lending, cash holdings and effective cash management could be a vital instrument for sustaining SMEs’ viability and financial performance in the wine business. The results obtained from the Greek wine business showed that cash holdings positively influence the profitability and viability of organizations, confirming the precautionary theory of cash holdings. Pre-crisis, small- and medium-sized enterprises (SMEs) and large firms both took considerable advantage of cash holdings; however, after the crisis the favorable effect of cash was more obvious and substantial for SMEs. Rossi et al. (2012) analyze the level and character of the success of the strategic design process in attaining sustainable competitive advantages. The sample is built on a survey of 180 Campania wine corporations in Italy. Regarding the financial aspect, the results suggest that the low capital of companies and their high financial exposure contribute to two negative effects. On the one hand, high-interest spending has a negative influence on performance, as it further deteriorates operating income, which is already low; on the other hand, it makes many of the high-quality wine companies vulnerable to purchases from major worldwide winemakers. After the crisis, Migliaccio and Tucci (2019) stated that the industry has shown growing profitability. But, from the evaluation of the balance sheet and the evolution of financial indicators, there is a strong inequity and excessive levels of inventories. In addition, the debt situation has become disproportionate: the leading presence of third-party financing would force huge recapitalizations and possibly demand growth in self-financing, which is feasible due to the ever-increasing profitability. Credit policy should consider these results by demanding imperative attention from potential capitalizations that justify access to regulated financial markets.
Over the past few decades, many authors have specifically studied the relevancy of working capital and its effect on corporate profitability. A significant number of researchers have conducted studies in several countries within different markets and industries on the value of efficiently managing working capital to maximize a firm’s profitability and eventually improve a firm’s performance. Working capital management is essential in industries as it influences the profitability and liquidity of the companies (Van Horne and Wachowicz 2008; Mandipa and Sibindi 2022). According to Russo (2013), the goal of managing working capital is particularly to maintain the ideal balance between all of the components of current assets. In this sense, obtaining solid knowledge about short-term financial operations through working capital management can allow the formulation of better strategies (Asare et al. 2022). Akinlo (2012) states that working capital management is an essential practice for companies. With the efficient management of working capital, firms could lower their reliance on external financing and use the released cash for additional investment and for enhancing the firm’s financial flexibility. Working capital can be managed using the cash conversion cycle determinants, such as account receivable days, inventory days, and account payable days. According to Raheman and Nasr (2007), maximizing profit and neglecting liquidity costs can cause a firm’s bankruptcy or insolvency. Hence firms must pursue an equilibrium point between liquidity and profitability using the three factors of the cash conversion cycle in the best way according to the characteristics of the firm’s industry.
Although Deloof (2003) advocates that working capital management plays an essential role in determining a company’s profitability, several studies that have been conducted on different firms and industries point out different results on how a company’s performance in terms of profitability is influenced by the effective management of its working capital, specifically the cash conversion cycle. Insofar as there is no consensual position on this topic, the present research aims to determine not only what type of relationship exists concerning working capital management in terms of its components and the profitability of the companies, but also aims to explore this link specifically in wine sector companies.

2. Working Capital

The definition of working capital management is the supervision of the firm’s current assets and the financing needed to provide the current assets (Van Horne and Wachowicz 2008). According to Bei and Wijewardana (2012), some companies should formally assume a policy of working capital management (WCM) aimed to lower the possibility of business failure and to improve business performance. Ross et al. (2017) explain the importance of working capital, stating that managing the firm’s working capital is a day-to-day action that guarantees that the company has enough resources to continue its operations and prevent expensive stoppages. This involves several activities connected to the firm’s receipt and disbursement of cash. In addition, excessive levels of current assets can easily stem from a substandard return on investment. But in companies with few current assets, there may be shortages and difficulties in sustaining regular operations (Van Horne and Wachowicz 2008). Agha (2014) considers that a company could increase its profit by managing working capital efficiently. Working capital management is widely seen as a valid instrument that can produce an impact on profitability and other financial indicators. According to Vishnani and Shah (2007), strategies and practices of working capital management have a deep influence on the profitability of companies. Nwankwo and Osho (2010) argue that efficient working capital management assumes a relevant part in establishing shareholder value, increasing business value, and growing businesses.
The effective management of working capital is critical for companies, mainly during the period of increasing investment opportunity set (Aktasa et al. 2015). Lind et al. (2012) suggest that with the efficient management of working capital, a company could enhance capital for additional strategic goals, decrease financial expenses, and boost profitability. Accordingly, financial managers have a concern regarding the management of working capital due to their responsibility of managing cash, marketable securities, accounts receivables, accounts payable, accruals, and other means of short-term financing. Only inventory management is out of its reach. Moreover, these management responsibilities require continuous, day-to-day supervision (Van Horne and Wachowicz 2008). These authors considered that working capital can also be a significant indicator for investors because it measures liquid assets that provide a safety cushion to creditors. It is also crucial to measure the liquid reserve available to meet contingencies and the uncertainties surrounding the company’s balance of cash inflows and outflows. To improve profitability and cash flow, many companies reduce investment in current assets through methods such as effective credit underwriting and the collection of receivables and just-in-time inventory management. Moreover, companies try to finance a large portion of their current assets through current liabilities, such as accounts payable and accruals, in an attempt to reduce working capital (Subramanyam and Wild 2009). Furthermore, working capital management requires two essential decisions: the analysis of the optimal level of investment in current assets and the appropriate mix of short-term and long-term financing used to support investment in current assets. These decisions may be further shaped by the trade-off that must be made between profitability and risk (Van Horne and Wachowicz 2008). On the one hand, conservative policies prefer reducing the risk arising from the decrease in investment in working capital, with a consequent decrease in profitability. On the other hand, aggressive policies tend to increase risk but also increase profitability (Smith 1980). To achieve this goal, working capital management should attain a balance between investing in inventories and customers and using supplier credit. Many previous studies have suggested that working capital management decisions influence firms’ profitability. Several of them even suggest that an adverse association could exist between diverse measures of working capital and profitability (Soenen 1993; Beaumont Smith and Begemann 1997; Shin and Soenen 1998, 2000; Wang 2002; Deloof 2003; Lazaridis and Tryfonidis 2006; Baños-Caballero et al. 2014; Raheman and Nasr 2007; Ramachandran and Janakiraman 2009; Zariyawati et al. 2009; Gill et al. 2010; Erasmus 2010a, 2010b; Mansoori and Muhammad 2012; Ngwenya 2012; Napomech 2012; Makori and Jagongo 2013; Enqvist et al. 2014; Ukaegbu 2014; Onodje 2014; Eldomiaty et al. 2023). Nevertheless, Lyroudi and Lazaridis (2000), Sharma and Kumar (2011), Abuzayed (2012), and Akoto et al. (2013) realize a positive connection amongst cash conversion cycles, return on investment, and net profit margin. These studies were conducted using samples that included companies of diverse sectors. Deloof (2003), based on the noteworthy negative impact found concerning gross operating income and the day’s inventory outstanding, accounts payable, and accounts receivable of Belgian firms, stated that executives can make value for shareholders through the reduction of the number of days sales outstanding and days inventory outstanding to a rational minimum. The same results were found by Baños-Caballero et al. (2014), who used a sample of 258 non-financial firms from the United Kingdom for the period of 2001–2007. The results suggest that there is a highly statistically significant U-shaped inverted association linking company performance and working capital. Moreover, the same kind of relationship was found with every element of the net trade cycle: accounts receivable to sales ratio, accounts payable to sales ratio, and inventories to sales ratio. In Cyprus, Charitou et al. (2010) explored the effect of working capital management on a company’s financial performance and collected data from the annual reports of 43 industrial-listed companies on the Cyprus Stock Exchange for the period 1998 to 2007. The authors used the cash conversion cycle, including the stockholding period, debtor’s collection period, and creditors payment period, for the independent variable, and they used return on assets as a dependent variable, which serves as a profitability measure. Using Pearson’s correlation analysis, the results suggested that profitability had an inverse relation with the cash conversion cycle, including all its measures, days in receivables, days in payables, and days in inventory. These results show that the company’s financial health is negatively related to all the measures of the cash conversion cycle. When the multivariate regression analysis model was applied to test the influence of working capital management in terms of the cash conversion cycle and the firm’s profitability, the results indicated that the days in inventory had an inverse relationship with profitability, while the sales growth showed a positive coefficient with profitability. These results suggest that growth leads to more profitability, and high-leveraged companies are less able to make a profit since these companies have more default risk. Additionally, Charitou et al. (2010) found from the regression of profitability against days payable and the control variables that days payable had a negative significant impact on profitability. In Finland, Enqvist et al. (2014) studied the effect of working capital management on a firm’s profitability in distinct business cycles. Enqvist et al. (2014) collected data from Nasdaq OMX Helsinki stock exchange-listed firms over 18 years. Enqvist et al. (2014) considered working capital management in the form of a cash conversion cycle with all its components, including the number of days for accounts receivable, the number of days for accounts payable, and the number of days for inventory, as independent variables. The authors considered return on assets as the measure of the firm’s overall profitability and both the gross operating income and non-financial assets as the dependent variables. The results of the regression model showed a statistically significant negative correlation between the cash conversion cycle and both measures of profitability, return on assets and gross operating income. Accordingly, Enqvist et al. (2014) suggested that firms can increase value by maximizing their working capital efficiency. In Greece, Lazaridis and Tryfonidis (2006) used a sample of 131 listed firms on the Athens Stock Exchange from 2001 to 2004. Lazaridis and Tryfonidis (2006) adopted Pearson’s correlation model and the results obtained show that there is a negative correlation between net operating income with outstanding sales days, outstanding payment days, and the cash conversion cycle. The regression model that Lazaridis and Tryfonidis (2006) applied exposed a highly significant negative association between profitability and the cash conversion cycle and a highly significant negative association between the gross operating profit with the number of days for accounts payable, and the same type of relationship existed between the gross operating profits with the number of days for accounts receivable. However, Lazaridis and Tryfonidis (2006) found an insignificant negative correlation between gross operating profit and the number of days for inventory. Those studies obtained similar evidence of the influence of the cash conversion cycle, the average number of days within which supplier invoices are paid, the customers’ credit period, the number of days for inventory, and the firm’s profitability. In line with the literature review, the results point to the negative impact on a firm’s profitability of the cash conversion cycle, the average period to receive, and the number of days for inventory. Regarding the number of days of accounts payable, the results suggested that this has a negative effect on the firm’s profitability. Thus, unlike the previous results, these results are not in accordance with the postulate in the literature review which advocates that to improve profitability, companies must try to finance current assets through current liabilities such as accounts payable (Subramanyam and Wild 2009). The authors suggest some explanations. According to Deloof (2003), the negative relation between profitability and accounts payable shows that firms will take more time to pay their bills if they are less profitable. Baños-Caballero et al. (2014) argued that this finding means that when the firm holds an ideal level of investment in its working capital, then it will balance expenses and benefits which ultimately maximize the company’s performance. Charitou et al. (2010) explained that the less profitable the company is, the more time it takes to repay its duties and obligations.
Other studies showed inconsistent results (Gill et al. 2010; Zawaira and Mutenheri 2014). Gill et al. (2010) used a sample of 88 American firms listed on the New York Stock Exchange for a period of 3 years from 2005 until 2007. The authors considered the cash conversion cycle, average period to receive, average payment period, and average collection period as independent variables and gross operating profit (profitability) as the dependent variable. The regression analysis showed that (i) there was a statistically significant negative association between the number of days of accounts receivable and profitability and (ii) no statistically significant association between profitability and both the number of days of accounts payable and the number of days inventory. In contrast, Gill et al. (2010) found a positive significant relationship between the cash conversion cycle and profitability, showing that the longer the cash conversion cycle, the higher the profitability of the firm. Zawaira and Mutenheri (2014) explored the influence of working capital management on the profitability of firms recorded on the Zimbabwe Stock Exchange for the period of 2010–2012. Zawaira and Mutenheri’s (2014) findings revealed the following results: profitability is not associated with the receivable collection period, inventory conversion period, cash conversion cycle, quick ratio, current asset to total asset ratio, current liabilities to total asset ratio, debt ratio, or the age of the company. However, Zawaira and Mutenheri (2014) found a negative and significant relationship between the payable deferral period and profitability. The results obtained revealed some inconsistency. Finally, Ngwenya (2012) considered the relationship between working capital management and profitability for a sample of 69 listed firms on the Johannesburg Stock Exchange (JSE) for the period of 1998–2008. Ngwenya (2012) found a statistically significant negative relationship between gross operating profit and the cash conversion cycle and the number of days for accounts receivable. However, Ngwenya’s (2012) findings showed a significant positive relationship between gross operating profit and the number of days payable and the number of days inventory. The signals obtained are in accordance with the signals expected for the variables cash conversion cycle, number of days for accounts receivable, and number of days payable. However, regarding the number of days inventory, the signal is different from what was expected. According to the literature review, to improve profitability, many companies reduce investment in current assets using methods such as just-in-time inventory (Subramanyam and Wild 2009). Mun and Jang (2015) explored the effect of U.S. restaurant firms’ working capital on profitability and the results showed a significant inverted U-shaped correlation between working capital and a company’s profitability (return on assets). According to Mun and Jang (2015), the firm’s cash level is an essential element for efficiently managing working capital. Tahir and Anuar (2015) studied the relationship between working capital management and the profitability of firms in the Pakistani textile sector. The authors suggest that the average collection period in days, the level of net working capital, the current assets to operating revenue ratio, the current assets to sales ratio, and the current liabilities to total assets ratio have a negative effect on return on assets. The authors found evidence that profitability is positively influenced by average payment terms in days, inventory turnover in days, the cash conversion cycle, the net trade cycle, the cash turnover ratio, and the current assets to total assets ratio. Another relevant result consists of the findings of Korent and Orsag (2018) and Baños-Caballero et al. (2014), which suggest that there is no linearity in the relationship between working capital investment and firm performance. This implies the recognition that an optimal level of working capital must be determined that allows for a cost–benefit balance and enables performance maximization (Baños-Caballero et al. 2014). Most of the studies carried out on this topic have a generic scope. This suggests that the results obtained on the influence of the cash conversion cycle, days of payable outstanding, days of receivable outstanding, and days of inventory outstanding on profitability are generic. Thus, most of the previous studies do not reflect the specificities of the different sectors. For instance, in the wine sector, the most expensive wines are older wines. However, the wine aging process requires companies to store wine until the process is complete. Hence, it is expected that for the wine sector, lengthening the days of inventory outstanding will increase the wine firm’s profitability.

This entry is adapted from the peer-reviewed paper 10.3390/admsci13080171

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