working capital
Impact of Liquidity Management on
Profitability
a study of the adaptation of liquidity strategies in a financial crisis
Authors:
Sanna Lamberg
Sandra Vålming
Supervisor:
Joakim Vincent
Student
Umeå School of Business
Spring semester 2009
Master thesis, one-year, 15 hp
Acknowledgments
We would like to express our gratitude to all the companies that took part of this study despite their busy schedules.
Very special thanks goes to our supervisor Joakim Wincent whose patience and understanding made this project a nice conclusion for our studies at the Umeå university.
We would also like to thank our families and love ones for their continuing support during this project and throughout our studies. Now it is time for us to test how well the knowledge carries us in practice.
In Hamburg and Umeå,
Sanna Lamberg & Sandra Vålming
Summary
The ongoing financial crisis which has upset the financial markets of the world since the late summer of 2007 has not left Swedish corporations unaffected. The effects for the Swedish corporations have been tougher credit terms, with banks enforcing debt covenants such as demands of a higher share of own capital. Strategies which can be adapted within the firm to improve liquidity and cash flows concern the management of working capital and cash management, areas which are usually neglected in times of favourable business conditions.
In this study it is examined how companies have adjusted their liquidity strategies before the crisis started to spread worldwide and a year afterwards, in the beginning of the 2009 when economies are in the middle of the turbulence, still feeling the consequences of the financial crisis and not yet started to recover. Research problem was inferred from the existing literature of cash management and consisted of two main questions:
Do active liquidity strategies have a positive effect on company’s profitability in times of financial turbulence/ economic
Profitability
a study of the adaptation of liquidity strategies in a financial crisis
Authors:
Sanna Lamberg
Sandra Vålming
Supervisor:
Joakim Vincent
Student
Umeå School of Business
Spring semester 2009
Master thesis, one-year, 15 hp
Acknowledgments
We would like to express our gratitude to all the companies that took part of this study despite their busy schedules.
Very special thanks goes to our supervisor Joakim Wincent whose patience and understanding made this project a nice conclusion for our studies at the Umeå university.
We would also like to thank our families and love ones for their continuing support during this project and throughout our studies. Now it is time for us to test how well the knowledge carries us in practice.
In Hamburg and Umeå,
Sanna Lamberg & Sandra Vålming
Summary
The ongoing financial crisis which has upset the financial markets of the world since the late summer of 2007 has not left Swedish corporations unaffected. The effects for the Swedish corporations have been tougher credit terms, with banks enforcing debt covenants such as demands of a higher share of own capital. Strategies which can be adapted within the firm to improve liquidity and cash flows concern the management of working capital and cash management, areas which are usually neglected in times of favourable business conditions.
In this study it is examined how companies have adjusted their liquidity strategies before the crisis started to spread worldwide and a year afterwards, in the beginning of the 2009 when economies are in the middle of the turbulence, still feeling the consequences of the financial crisis and not yet started to recover. Research problem was inferred from the existing literature of cash management and consisted of two main questions:
Do active liquidity strategies have a positive effect on company’s profitability in times of financial turbulence/ economic
Bibliography: The financial crisis is said to have started in the late summer of 2007 when two hedge funds collapsed, belonging to the American firm Bear Stearns (Foster & Magdoff, 2009:11) since the Great depression in the 1930s’ (Foster & Magdoff, 2009:11). (www.va.se. and www.svd.se). Following these events they turned to safer investments which are more liquid, signaling that cash is king once again (Foster & Magdoff, 2009:97-98). in times of favorable business conditions (Pass & Pike, 1984:1). The value of liquidity has been claimed to be one of the ten unsolved problems in finance (Brealy & Meyers 1996, cited in Kim, Mauer & Sherman, 1998) and has been investigated by many researchers. It is a 7 the company’s liquidity and profitability as studied by Pass and Pike (1984), Shin & Soenen (1998) amongst others. strategies. Maynard E. Rafuse (1996:59) suggests that those companies who are aiming for minimizing their working capital strategies should concentrate on managing their stocks