CASH-GENERATING AND CASH-ABSORBING PRODUCTS: AN ADVANCED ANALISYS OF WORKING CAPITAL IN A METALLURGIC COMPANY

Abstract

The manufacture and the commercialization of a product generate an economic return, which will allow the firm to invest and to pay dividends to shareholders. However, under the financial view, payments concerning the industrialization and sales of this product (such as suppliers of raw materials, labor, taxes, etc.) may happen before the respective receipts. This creates the need for applying a certain amount of financial resources in the product’s operations to keep its level of sales. Differently, if the receipts of a product happen before the payments, it has a negative need for working capital, i.e., instead of claiming a permanent investment in its activities, the product provides financial resources as long as its level of commercialization is maintained. The resources that must be invested in the operations have a cost, the cost of borrowing money, or the opportunity cost if the firm is capitalized. Thus, working capital needs of a product impact its own profitability. This study aims to show how the need for working capital of a product affects its contribution margin. To do so, we took a product of a steel mill factory and firstly we verified its nominal contribution margin. Then we calculated its average collection period, average age of the inventory and average payment period, finding the cash conversion cycle. Following, we investigated how much resources the product generates or takes from the firm to keep its level of sales. At last, all variable costs and the revenue were discounted to present value, discovering the product’s real contribution margin. We verified the product is a taker of cash and the firm finances a lofty amount of resources to maintain its level of commercialization. Consequently, the impact of the cash conversion cycle on the contribution margin was relatively high, mainly due to the average age of the inventory.