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Portofolio Managament Approach in Trade Credit Decision Making

Author

Listed:
  • Michalski, Grzegorz

    () (Wroclaw University of Economics, Department of Corporate Finance and Value Management, ul. Komandorska 118/120, pok. 704-Z, PL53-345 Wroclaw, Poland)

Abstract

The basic financial purpose of an enterprise is maximization of its value. Trade credit management should also contribute to realization of this fundamental aim. Many of the current asset management models that are found in financial management literature assume book profit maximization as the basic financial purpose. These book profit-based models could be lacking in what relates to another aim (i.e., maximization of enterprise value). The enterprise value maximization strategy is executed with a focus on risk and uncertainty. This article presents the consequences that can result from operating risk that is related to purchasers using payment postponement for goods and/or services. The present article offers a method that uses portfolio management theory to determine the level of accounts receivable in a firm. An increase in the level of accounts receivables in a firm increases both net working capital and the costs of holding and managing accounts receivables. Both of these decrease the value of the firm, but a liberal policy in accounts receivable coupled with the portfolio management approach could increase the value. Efforts to assign ways to manage these risks were also undertaken; among them, special attention was paid to adapting assumptions from portfolio theory as well as gauging the potential effect on the firm value.

Suggested Citation

  • Michalski, Grzegorz, 2007. "Portofolio Managament Approach in Trade Credit Decision Making," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 4(3), pages 42-53, September.
  • Handle: RePEc:rjr:romjef:v:4:y:2007:i:3:p:42-53
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    Citations

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    Cited by:

    1. Karolina Biernacka, 2013. "Krótkoterminowe planowanie finansowe na przykładzie przedsiębiorstwa z branży budowlanej," Working Papers hal-00804617, HAL.
    2. Michalski, Grzegorz, 2012. "Risk sensitivity indicator as correction factor for cost of capital rate," MPRA Paper 43399, University Library of Munich, Germany, revised 02 Sep 2012.
    3. Karolina Biernacka & Jolanta Lont, 2013. "Prognoza przyszłorocznej sprzedaży dla przedsiębiorstw z branży budowlanej i medycznej," Working Papers hal-00804616, HAL.
    4. Michalski, Grzegorz, 2010. "Planning Optimal From The Firm Value Creation Perspective. Levels Of Operating Cash Investments," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 198-214, March.
    5. Karolina Karcz & Malwina Bielawska, 2013. "Planowanie przychodów ze sprzedaży na przykładzie przedsiębiorstwa z branży sprzedaż hurtowa napojów alkoholowych ( PKD 46.34A) oraz z branży sprzedaż hurtowa artykułów elektrycznych użytku domowego (," Working Papers hal-00814297, HAL.
    6. Michal Pilecki, 2013. "Risk Managment in Creating Value of Company in Example of Food Production Branch Companies
      [Zarządzanie Ryzykiem W Tworzeniu Wartości Na Przykładzie Przedsiębiorstwa Z Branży Spożywczej]
      ," Working Papers hal-00811907, HAL.
    7. Monika Hurna & Kwiecień Krzysztof, 2013. "Zarządzanie wartością przedsiębiorstwa na przykładzie przedsiębiorstw z branży wydobywczej," Working Papers hal-00804798, HAL.
    8. Aneta Hutta, 2013. "Zarzadzanie ryzykiem w tworzeniu wartosci na przykladzie przedsiebiorstwa zbranzy spozywczej (Risk Management in Creating Value in the Example of Companies from the Food Production Branch)," Working Papers hal-00811906, HAL.
    9. Monika Brzezińska & Katarzyna Guhn, 2013. "Planning of sales on the example of companies in the paper industry and wholesale of chemical products," Working Papers hal-00812840, HAL.
    10. Aneta Hutta & Michal Pilecki, 2013. "A. Hutta, M. Pilecki, Uniwersytet Ekonomiczny we Wrocławiu, Zarzadzanie wartoscia przedsiebiorstwa na przykładzie przedsiebiorstw z branzy spozywczej," Working Papers hal-00804861, HAL.

    More about this item

    Keywords

    accounts receivable; trade credit management; incremental analysis; value based management; portfolio analysis;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • P33 - Economic Systems - - Socialist Institutions and Their Transitions - - - International Trade, Finance, Investment, Relations, and Aid
    • P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance

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