Improvement on Order/Billing Routines

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Liquidity Management

To have efficient and effective liquidity management is very important for the survival, especially for smaller businesses (Sardakis et al, 2007), since they operate with fewer sources of both short and long run financing than bigger companies (Moss, 1993). Liquidity means the level of cash and near cash assets held, together with cash in and outflows of the assets (Ekanem, 2010). It is possible to measure a firm’s liquidity with different type of cash flow ratios (Jooste, 2006). How they are calculated is presented later on. These ratios are very helpful to determine the firm health as well (Jooste, 2006). One can measure the cash flow ratios on supplier and potential buyers in order to se if they are healthy and confirm that they do not have any liquidity problem (Figlewicz & Zeller, 1991). The concept of performance ratios is not something new, but the availability of the data is easier to get today and firms should take advantage of that information (Carslaw & Mills, 1991). As it wash discussed earlier, an optimum liquidity position is a decision to shorten the cashto-cash cycle (Farris & Hutchison, 2002). That improves the profit and means that the firm does not have a great need for external financing (Moss, 1993). Management of working capital is crucial for both the liquidity and profitability. If the management of working capital is poor, usually means that money is locked up in working capital (Ekanem, 2010). It is also important to be aware of that late payment of invoices can be very expensive (Deloof, 2003). Efficient management of working capital is important, especially for smaller firms in an economic downturn, which happened in 2008.

Liquidity Reserve

It is not enough to just have a budget to make sure to have money for different types of transactions. The company should hedge themselves for various surprises that the company can run in to (Larsson & Hammarlund, 2004). The size of the liquidity-reserve depends on many factors. There is of course a relationship between the cash cycle and the liquidity reserve. If the cash cycle is long, then the minimum liquidity needs an increase and vice versa (Farris & Hutchison, 2002). By having a minor reserve can be risky while to large reserve can lead to a reduction in revenue (Larsson & Hammarlund, 2004). How the profitability is affected can vary. By calculating cash flow ratios, one can determine how well the firm can repay loans, to maintain operating capabilities and make investments without external financing (Jooste, 2006). To be measure the liquidity one can measure the relation between the liquid assets and short-term debt in the company’s balance sheet (Moss, 1993).

Factoring

Factoring could be one of the solutions to speed up the cash cycle. This means that the firm receives finance from the factor (Kirkby, 1993). In this way, the tied up capital is released. The major banks have become more involved either direct or indirectly with factoring, as a banking service (Kirkby, 1993). Factoring can also be seen as a sales accounting service that protects the firms against bad debts (Kirkby, 1993). Another advantage is that the current ratio is strengthened (Kirkby, 1993). The current ratio is very important especially for banks, when a company is considering a bank loan because a bank manager has to rely on past performance as a tool (Phelps, 1956). By having a factor agreement, the company can focus on production and marketing which is very important for companies with weak accounting (Kirkby, 1993). Factoring involves an agreement between the company and the factor (which can be banks or factor companies), it could be for a time period or just for one invoice (Kirkby, 1993). This graph presented below shows how the factoring process usually looks like.

Leasing

Asset based financing such as leasing could be considered for the short-term financing (Callimaci et al., 2011) since it releases capital, which would in other wise be tied up on inventory or other equipment’s (Larsson & Hammarlund, 2004). Leasing means that the lessee obtains the right to use the asset for a fee but the lessor maintains the ownership (Callimaci et al., 2011). The price and the length of the contract can be compared by finding the present value of the cash flow over the period of the lease or by algebraic models (Rowland, 2000). Leasing can be seen as a more flexible way to finance an asset than traditional lending because it can be customized for the seller in a number of ways (Callimaci et al., 2011). An example can be that the payment schedule is adjusted to suit the companies cash flow needs and the rates tends to be lower than bank loans. Another attempting feature with leasing is the possibility to upgrade the equipment during the end of the contract and also the sales-tax deferral (Callimaci et al., 2011). Advantage such as selling the equipment when they are no longer needed vanishes with leasing, however, the company do not have to worry about the devaluation of the equipment (Smith & Wakeman, 1985). Leasing could also save the lessees on high external costs such as service/repairs (Sharpe & Nguyen, 1995).

Quantitative or Qualitative Approach

A quantitative study usually has a logical and linear structure and hypothetical expectations are conducted between different relations (Eidable et al., 2002). This means that the determination of these relations in that specific subject will then result in either a rejection or acceptance of the hypothesis. A quantitative study relies on analysis and analysis of statistical data to establish the relation between one set of data to another (Eidable et al., 2002). A qualitative study means a focus on meaning and understanding of the subject (Eidable et al., 2002). Instead of focusing on relying on measurements of statistical data, qualitative study is acquired to understand the natural setting of the subject with help of observations and interviews (Eidable et al., 2002). Therefore, an in depth knowledge is essential to achieve appropriate understanding. This means that qualitative studies are associated with face-toface communication with people and observations (Eidable et al., 2002).

Table of Contents :

• 1 Introduction
  • 1.1 Background
  • 1.2 Jonsons Byggnads AB
  • 1.3 Problem Statement
  • 1.4 Purpose
  • 1.5 Delimitation
  • 1.6 Methodology
• 2 Theoretical Framework
  • 2.1 Restricted Capital
  • 2.2 Payments
    • 2.2.1 Sales Ledger
    • 2.2.2 Analysis on Accounts Receivables
    • 2.2.3 Term of Payment
    • 2.2.4 Improvement on Order/Billing Routines
    • 2.2.5 Interest-bearing
  • 2.3 Payouts
  • 2.4 Liquidity Management
    • 2.4.1 Liquidity Budget
    • 2.4.2 Liquidity Reserve
  • 2.5 Short-term Financing
    • 2.5.1 Factoring
    • 2.5.2 Leasing

• 3 Method
  • 3.1 Quantitative or Qualitative Approach
  • 3.2 Why Jonsons Byggnads AB
  • 3.3 Primary and Secondary Data
    • 3.3.1 Observation
    • 3.3.2 Interview
  • 3.4 Reliability and Validity
  • 3.5 Criticism of the source
• 4 Empirical Findings
  • 4.1 Payments
    • 4.1.1 Sales Ledger
    • 4.1.2 Payment Routines
    • 4.1.3 Make the Money Interest-bearing
  • 4.2 Liquidity Management
  • 4.2.1 Liquidity Budget and Reserve
  • 4.3 Short-term Financing
    • 4.3.1 Factoring
    • 4.3.2 Leasing
• 5 Analysis
  • 5.1 Payments
    • 5.1.1 Sales Ledger
    • 5.1.2 Payment Routines
    • 5.1.3 Make The Money Interest Bearing
  • 5.2 Liquidity Management
    • 5.2.1 Liquidity Budget
    • 5.2.2 Liquidity Reserve
  • 5.3 Short-term Financing
    • 5.3.1 Factoring
    • 5.3.2 Leasing
• 6 Conclusion
  • 6.1 Future research
  • References
• 7 Appendices
  • 7.1 Appendix 1 – Statement of Income
  • 7.2 Appendix 2 – Balance-sheet
  • 7.3 Appendix 3 – Payment plan “lifts”
  • 7.4 Appendix 4 – Key Ratios and Calculations
  • 7.5 Appendix 5 – Interview Guide

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Cash Management Improving the Liquidity for Jonsons Byggnads AB With Cash Management