Working capital considerations in Finnish scrap metal recycling industry and the effect of reverse VAT treatment
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School of Business |
Master's thesis
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Date
2019
Department
Major/Subject
Mcode
Degree programme
Finance
Language
en
Pages
114
Series
Abstract
The purpose of this paper is to examine with structured interviews the methods in which Finnish scrap metal recyclers manage their working capital. Specific attention has been paid to legislation that introduced reversed value-added taxation for scrap metal in 2015 and its effect to net working capital levels. Due to the change smaller participants in scrap metal markets lost the value-added tax related debts, whereas the top of the value-chain was able to accrue them two-fold. The paper seeks to find out whether such change would deteriorate the financial position of such smaller participants that have been shown in previous research to be heavily dependent on retained earnings, working capital finance and of limited number of banks. In addition, the paper seeks to evaluate the overall effect of the legislative change by taking into account the aforementioned indirect impact, targeted direct impacts and the fluidity of implementation. In essence, the paper is a qualitative study and targets to strengthen the existing research by providing further depth. In order to fulfill the target, the paper utilizes a narrow group of five interviewees. Although the paper shows that working capital management is essential, especially for inventory management, it reveals in the interview analysis that the interviewed smaller operator often prefers profitability increasing market-timing measures to strict processes aiming to minimize capital employed. The larger operators are more balanced in their optimization of profit and capital employed. A defining factor emphasizing the importance of working capital management and inventory management is the price volatility on scrap metal markets. A more robust view on the value of scrap metal with suppliers combined with rapid price movements with end-users have radically altered the market fundaments. The paper finds out that preferred reaction for these changes is to focus and to process further. The former might have significance with the research on circular economy as it might influence the recycling-levels of different materials. On the other hand, the paper finds out that the interviewees find the supply of scrap metal to be very price sensitive which has been debated in prior research on circular economy. Reverse value-added tax was not found to be a meaningful factor for working capital either with large or small operators. A small operator found that the loss of funds available on short-term was amply compensated as the hassle of value-added tax payments was no longer needed. The impacts of reverse value-added tax legislation were deemed positive by both the industry and officials alike. A determining factor for this was the good rapport between parties that started already at the initiation of the change.Description
Thesis advisor
Torstila, SamiKeywords
working capital, value-added tax, SME finance, metal scrap, circular economy