BUS8102 - HAECO's Working Capital Management Case Study (Sem 1)

This case study examines the working capital management practices of Hong Kong Aircraft Engineering Company Limited (HAECO), focusing on the impact of inventory management and the termination of the Airbus A380 program on the company's financial performance. The research utilizes secondary data from HAECO's annual reports to evaluate the company's financial efficiency through ratio analysis and other quantitative methods. The study explores how inventory turnover and cash conversion cycles influence profitability, and how strategic decisions like discontinuing the Airbus A380 affect HAECO's working capital needs. The literature review supports the importance of effective working capital management in maintaining liquidity and enhancing profitability, with an emphasis on shortening the cash conversion cycle. This assignment is available on Desklib, where students can find more solved assignments and past papers.

Running head: A CASE STUDY ON HAECO’S WORKING CAPITAL MANAGEMENT
Case study on HAECO’s working capital management
Name of the Student
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A CASE STUDY ON HAECO’S WORKING CAPITAL MANAGEMENT
Executive summary:
This particular research has been proposed to identify the procedures involved in the
working capital management of Hong Kong Aircraft engineering company limited
(HAECO). It intends to evaluate the impact of inventory on the working capital management
and ultimately determining its impact of the profitability position. In addition to this, the
research also tends to ascertain the impact of termination of airbus A 380 on the working
capital of HAECO. The data used for the analysis purpose is secondary data which has been
obtained from a single source that is annual report published official website of company.
Literature review throws some light on the findings generated from various prior research
papers on identifying the relationship between working capital, inventory and profitability.

A CASE STUDY ON HAECO’S WORKING CAPITAL MANAGEMENT
Table of Contents
1. Introduction:...........................................................................................................................3
2. Rationale of the research:.......................................................................................................3
3. Objective of research:............................................................................................................3
4. Methods of research:..............................................................................................................3
4.1 Research design................................................................................................................3
4.2 Research approach:..........................................................................................................3
4.3 Data collection method....................................................................................................3
4.4 Type of data......................................................................................................................3
5. Literature survey:...................................................................................................................3
6. Expected outcomes:...............................................................................................................3

A CASE STUDY ON HAECO’S WORKING CAPITAL MANAGEMENT
1. Introduction:
The working capital management of “Hong Kong Aircraft engineering company
limited” has been evaluated in this research proposal. The proposal has been developed on
the basis of research objectives and the rationale of research and shall deal with the literature
survey, methods of conducting research which helps in arriving at the expected outcomes.
One of the most challenging and important aspect of overall financial management is
effective and efficient management of working capital. HAECO is one of the leading
independent aircraft maintenance and engineering group and the development of company is
reflected in its operational excellence, technical expertise, innovation and service integrity
(Haeco.com 2019). It opened new facilities across region as it began building on its response
to meet the ever changing demand and building on its capabilities. HEACO intends to meet
the needs of customers with the confidence of its vision, adaptability and determination and
thereby ensuring bright future.
Therefore, in this paper, the impact of inventory on the working capital management
is identified by computation of various ratios impacting the same. Since the sample under
analysis is Hong Kong aircraft engineering company limited. Another aspect that the
researcher intends to discuss is the impact of termination of airbus A 380 on the working
capital management of HAECO. The model of airbus A 380 had its own issues and the
decision to end the production is centered on the financial matters. This particular airbus
involved higher operational cost and higher price tag. With the advancement in technology,
companies manufacturing airbus shifting their focus towards developing the models that
enable customers to fly at lower cost and fly farther. Therefore, it has been found that this
model did not have large back orders.

A CASE STUDY ON HAECO’S WORKING CAPITAL MANAGEMENT
2. Rationale of the research:
The rationale of the topic is to evaluate the impact of classes of aircraft making on the
working capital management of HAECO. In short, it can be said this research paper intends
to account for factors on the decision making and one such factors involves working capital
management that is the topic of concern. One of the most relevant decisions taken by
company is the management of working capital as it influences both liquidity and
profitability of organization. The empirical verification in this paper is directed towards the
identification of working capital management areas which is considered relevant for
maintaining adequate liquidity level. Maintenance of financial stability in organization is one
of the important aspects of working capital management (semanticscholar.org 2019). In order
to understand the working of aircraft, it is required to inspect into the age of aircraft and its
servicing cost.
3. Objective of research:
 To evaluate the financial efficiency of HAECO by evaluating the working capital
management
 To examine the impact of termination of one category of aircraft on the working
capital management of HAECO.
4. Methods of research:
4.1 Research design
Research design is a conceptual structure constituting of the measurement, collection
and analysis of data. It is a way that helps in systematically solving the issue by allocating the
procedure. It is process of conducting research in an organized and systematic manner by
allowing understanding of several types of techniques. Researcher can engage in the study

A CASE STUDY ON HAECO’S WORKING CAPITAL MANAGEMENT
using methods such as hypothesis, descriptive and exploratory. The main objective of
designing research is to ensure that adequate evidences are obtained so that research
problems are effectively addressed (Wasiuzzaman 2015). This particular research is a case
study design that narrows down research to a few researchable examples. A variety of
methodologies can be applied by research in case study design and research problem can be
investigated by using variety of sources. For this study, the research design used by
researcher is descriptive explanatory which institute that suggestion is required for this type
of design and it is demanded by the study that questions are interpreted into
recommendations. This type of research involves quantitative analysis for hypothesis testing
and responding to questions by gathering large number of data. Under the descriptive
research, it is suitable to perform quantitative analysis which intends to test the hypothesis by
gathering large number of data and the method being more reliable and objective and not
getting influenced by the opinion of researchers (McCusker and Gunaydin 2015).
4.2 Research approach:
The research approach employed in this particular research paper is deductive that
usually begins with hypothesis and emphasizes on quantitative analysis. It is essential to
dispel the nation that quantitative research is confirmatory and deductive. Deductive
approach intends to develop hypothesis based on existing theory and testing the hypothesis
by designing a research strategy (Cuervo et al. 2017). The approach is descriptive and
explanatory because the researcher is required to give an explanation of how the inventory is
impacting the movement of working capital and ultimately the profitability level of company.
The sample under the study is the aircraft engineering company named HAECO.
In this research paper, the impact of the aircraft on the working capital management is
evaluated by taking data from the official website of company. The group intends to expand

A CASE STUDY ON HAECO’S WORKING CAPITAL MANAGEMENT
its service offerings to new generation of aircraft with the evolving needs of customers and
changes in the aviation industry (Talonpoika et al. 2016).
In the given case under analysis, aircraft are the inventory stock and the general rule
says that quickly dispatching the inventory positively impacts the working capital. It has the
consequence of effectively managing the working capital by moving the inventory quickly
and generating the faster cash conversion cycle which significantly influences the
profitability position of company. On other hand, if the inventories are moving slowly, then
the entire process of working capital management would slow down. Slower moving
inventory creates disruption in the whole cycle by slowing down the cash conversion cycle
and thereby creating a positive impact on the level of profitability (Masudin et al. 2016).
Termination of airbus A 380 would create a positive impact on the working capital
management of HAECO by making it smaller. This is so because the demand of airbus A 380
has reduced dramatically with its largest costumer reducing their order to 14 compared to 50
aircrafts. The type of aircrafts that is manufactured is being altered by the consumer behavior.
This airbus would have been perfect for those operating between major hubs such as Dubai,
London and New York. Changing preference of customers as they want to fly to their own
final destinations is the factor leading to terminate the production of A 380 (Simple
Flying .com 2019). Except the major hubs, small airports are not able to support such airbus.
Furthermore, with the advancement of technology, companies are able to manufacture
smaller plane at cheaper cost.
Therefore, from the analysis of the facts associated with the termination of A 380, it
can be inferred that working capital of HAECO would be positively impacted. This is so
because had such airbus not been terminated would have increased the working capital as it
would be difficult for company to clear the stocks due to declining demand. This would lower

A CASE STUDY ON HAECO’S WORKING CAPITAL MANAGEMENT
the cash conversion cycle and reduce the inventory turnover ratio. Reduction in such figures
would cause cash to get blocked in the cycle and increase the working capital and thereby
lowering the level of profitability.
4.3 Data collection method
In the present study, secondary data is used by researcher and the collection of
secondary data is done from the website of the company under analysis. Researcher obtains
the data and numerical variables from the annual report of HAECO published on its website.
Therefore, the only source of gathering data and the information needed for conducting
research is collecting data by referring to the annual report. Nevertheless, the only source of
information is the annual reported obtained from the website of company.
4.4 Type of data
Data required for research should be appropriately ascertained and there are two types
of data which the researcher can use in the research paper. In this paper, researcher is making
use of secondary data from one source as the research design is case study on one company
based which narrows down the source of data collection.
The research proposes to use data using the annual report of the company under
analysis. These are the numerical figures that have already been published by the company
and hence, research makes use of secondary data (Wasiuzzaman 2015). Full compilation of
secondary data provides the proof of the fact that there is no involvement of human behavior.
However, all the relevant and necessary financial information is not disclosed by the financial
statements.
4.5 Analysis of data
In this paper, researcher is relying on analysis of quantitative data and the type of data
chosen for analysis is dependent upon the research topic. Analysis of data depicted in the

A CASE STUDY ON HAECO’S WORKING CAPITAL MANAGEMENT
financial statements would help in obtaining relevant information for ascertaining the impact
of inventory on the working capital management. Some of the financial tools that help in
analyzing the data determining the impact of inventory on working capital are ratio analysis.
Ratio analysis would help in measuring the efficiency of working capital management and
liquidity. Some of the ratios that would be computed to analyze the impact of inventory on
the working capital management include current ratio, acid test ratio, inventory turnover
ratio, cash ratio, accounts receivable ratio, net working capital turnover and return on assets
(Singhania and Mehta 2017). For evaluating the effectiveness of working capital
management, a table is framed for comparing the figures of the calculated data.
5. Literature survey:
This section deals with the research problems by covering on the information related
to the topic of research. The purpose of literature review is to describe the concept of working
capital by identifying, analyzing and testing several drivers. The concept of working capital
management is no longer seen as discipline with the principal aim of maintains sufficient
liquidity in event of liquidation (Marzo and Scarpino 2016). Rather, the objective of such
managing working capital is to underpinning operating cycle of company. Working capital
management has been highlighted as the major factor of success of profitability of firm with
the increased focus on the operating cycle. Literature provides for the suggestions on how the
working capital decisions are adjusted to the technology, nature of business, credit
conditions, demand and other factors. The objective of the optimum working capital
management is to shorten the cash conversion cycle as it helps in increasing the profitability
of company (Li and Wu 2017).

A CASE STUDY ON HAECO’S WORKING CAPITAL MANAGEMENT
Working capital management is the important concept of the financial management
with a number of researches work has been done on evaluating the several components of the
same. It is the management of current liabilities, current assets and total level of debts to
generate profits. It is suggested by the empirical evidence relating to profitability and
working capital management that profitability in organization is enhanced by the aggressive
policies of working capital (Kasiran et al. 2016). Working capital management found to have
vitally impact the financial health of company. The main focus of the management of
working capital is on investment and short term financing decisions of firms and it involves
the decision on the composition and financing of the amount of current assets. Organization
having effective working capital management ensures that the company has adequate access
to the funds required for meeting the daily operating expenses (Ghadge et al. 2016). Most of
the literature indicated a significant negative relationship between the profitability of the firm
and profitability of the firms.
Most of the research papers have conducted the analysis of measuring the dependant
variable that is working capital and its behavior which is impacted by the way inventory
managed. As it is known that working capital influences the profitability level of firms,
hence, the impact of inventory can be used to measure the dependant variable by using proxy
to measure the profitability of firms such as gross operating profit, stock returns and return on
assets (Inkinen 2016).
It is indicated by one of the study that companies are significantly impacted by the
working capital management and the result was based on companies of UK. This has been
done by increasing the market value of firms by creating a balance between cost and revenue.
Another study conducted evaluated the data of 134 companies ranging from year 2005 to year
2011. It is stated by the study that there exist meaningful relationship between business

A CASE STUDY ON HAECO’S WORKING CAPITAL MANAGEMENT
performance and working capital management along with evaluating the aggressive policy of
working capital contributing to business development (Bianchi Martini et al. 2016).
Furthermore, it is analyzed that the risk of inability to meet the current obligations is
eliminated by management of liquidity that involves controlling and planning of current
liabilities and assets. It has been found in the study that the utmost important measure of
liquidity is cash conversion cycle compared to current ratio. An adverse gap was witnessed
between liquidity position and indicators of profits position of firms (Hailu and
Venkateswarlu 2016).
Study on the management of working capital as a whole requires discussing about the
individual components of working capital. However, there were few studies on the individual
working capital components. The prior literature work had some issues such as lack of
systematic development study and survey based approach. It has been concluded by major
research paper that the corporate profitability is dependent upon the working capital
management of organization (Aviation.itu.edu.tr 2019).
The study conducted in the manufacturing sector of Turkish where the companies
listed on Istanbul stock exchange were examined by analyzing the impact of working capital
on the performance of business. It was identified that the profitability of the firms are reduced
due to lower cash conversion cycle. It has been expressed by the author that company should
lessen the cash conversion period for increasing the profitability (Amachree et al. 2017).
In one of the study conducted on textile companies traded in the stock exchange of
Pakistan realized that there exist negative correlation between liabilities and profitability and
positive correlation exist between accounts receivable and profitability. In addition to this, the
profitability of company increased due to an increase in the receivables, cash and inventories.
Therefore, it was identified that the profitability of company can increase because of effective

A CASE STUDY ON HAECO’S WORKING CAPITAL MANAGEMENT
management of working capital. As a consequence of this study, it was found that the
working capital should be high enough to maintain profitability without any issues and low
enough not to reduce the profitability (Afrifa and Padachi 2016).
Since working capital is considered as one of the indicator of liquidity of firm, it is
considered essential to identify the relationship between liquidity and profitability. In one of
the paper, the liquidity of firms in the sample is measured by cash conversion cycle and
current ratio. The two significant results were found and the liquidity level of firm is
negatively related with the profitability as indicated by current ratio (Ijltemas.in 2019).
Furthermore, it was found that the profitability is affected by cash conversion cycle as against
current ratio. Management of working capital is affected by holding cash at reasonable level.
In a research conducted on the companies of UK, it was found that company is
significantly impacted by the working capital policy. This is so because if the inventories are
cleared in a short period of time, then it would lower the cash conversion cycle and shorten
the working capital which would help in clearing stocks and generating cash by selling the
inventories (Hoang 2015). Hence, it can be said that the faster clearing of inventories would
lessen the working capital and generates cash and ultimately has a positive impact on the
profitability level.
While in most of the cases, it has been found that there exist positive relations
between fast movement of inventories and working capital management and ultimately
profitability. The size of inventory has a direct impact on working capital management. It is
demonstrated from the findings of the literature review that inventories of company
considerably impacts the working capital management and thereby influencing the
profitability levels (Aminu and Zainudin 2015).