LIQUIDITY MANAGEMENT BY EFFECTIVE DEBT COLLECTION : A STATISTICAL ANALYSIS IN A SMALL INDUSTRIAL ENTERPRISE

The financial viability of small companies depends on their ability to meet sales demands and collect receivables from the sales of goods and provision of services. The efficiency of debt recovery plays the fundamental role in determining the liquidity of a small business. Shortages of cash in the company are rarely subsidised not from external sources but most often from the owner’s own funds that such shortages are made up, including the amounts previously accumulated as a result of the so-called excess liquidity. The main purpose of the article is the hypothesis that application of statistical analysis in liquidity management can be a useful tool in effective debt collection in an enterprise.We looked at the monthly or short-term liquidity of a small business and its impact on the defined performance metrics of debt collection. The analytical tool is a dynamic econometric model that describes the impact of the efficiency of recovery for liquidity in small business.


Introduction
In a small enterprise, usually there is no one who pays due attention to statistical information and is responsible for gathering it.The owners of such companies are generally not interested in data concerning their past business.They collect only the data that they are legally bound to collect.It is, however, useful for the management of a company to have some statistical information on its past activities, especially on a monthly basis.It is particularly important to have past financial statistics describing the intensity of sales and the manufacturing process.
Having the capital necessary for the prompt payment of bills is one of the most important responsibilities of small businesses.The lack of statistical information in a small company means that liquidity performs a special role.The financing of business in this respect is usually done with their own funds.Bank loans are very rarely a viable means of doing this.
Since 1990, banks have been reluctant to extend loans to them as liquidity buffers.The liquidity of a small business depends on its ability to meet sales as well as to collect active debts for the goods sold and services provided.The effectiveness of the recovery1 of debt plays the crucial role in determining the liquidity of a small economic entity.
Shortages of capital in a company are rarely supplemented by external funds.The owner's own resources constitute the majority of a company's capital, including funds previously accrued from the temporary ownership of excess financial liquidity.In this work, we shall look at the monthly, i.e. short-term, liquidity of small companies.
The main purpose of the article is the hypothesis that the application of statistical analysis in liquidity management can be a useful tool for the effective debt collection in an enterprise.

The study literature on liquidity in small enterprises
Crucial for the survival and successful development of small and micro firms is the role of their financial management.This has been recognised by the Bank of England in its annual reports on the Finance of Small Firms (Bank of England;1997;1998, 1999a;1999b).The importance of liquidity in company management has been addressed in the literature.Small and medium enterprises (Smes) are seen as a driving force behind the economy (khan, Jawaid, 2004).They contribute immensely to the economic development of any country (abor et al., 2010).In the eU, there are over 20 million Smes.They represent 99% of companies operating in europe, and they are also the main engine of economic growth, innovation, employment, and social inclusion.
maintaining liquidity is particularly important in small and medium-sized business.K.C. Chan, Nai-Fu Chen (1991) argue that smaller firms tend to be more sensitive to changes in the economy.Higher financial leverage, cash flow problems and less efficient management are attributes that make small and mid cap companies riskier than their larger counterparts (Chan, Chen, 1991:1482).Due to their specificity, SMEs have problems securing external funding.They must, therefore, base their business largely on equity.The lack of available capital constitutes a direct threat to the existence of the company.A study of liquidity is of major importance to both internal and external analysts because of its close relationship with the day-to-day operations of a business (Bhunia, 2010).The difficulty in liquidity management is the achievement of the expected balance between liquidity and profitability (Raheman et al., 2007).
a lack of liquidity leads to small businesses going bankrupt.The economic practice confirms that bankrupt enterprises often had no liquidity, albeit other aspects of their operations may have been satisfactory.It is crucial in managing working capital to maintain sufficient liquidity in day-to-day operations to ensure its smooth running and ability to meet its obligations (Eljelly, 2004).At the same time, the proper management of floating capital in the business, i.e. inventory, accounts receivable and current liabilities that consist of cash conversion cycle, is extremely important.maintaining the liquidity in the company is determined to a high degree by the level and structure of the floating capital.In the course of business, both the structure of and the demand for this capital fluctuate greatly.This happens as a result of decisions regarding the purchases of raw materials and materials, goods, stock, the terms of collection of current receivables and the regulation of current liabilities.The too low level of the floating capital may result in the loss of financial liquidity.It may cause unreasonable additional costs in raising capital to finance part of the assets, or costs of lost opportunities when property is financed through equity.Smes are of great importance in reducing the risk of liquidity loss resulting from immobilisation of part of the assets in difficult-to-sell inventories or hard-to-recover collectible receivables.An effective debt collection is therefore crucial in the financial management of a company.

Static evaluation of financial liquidity in business
The literature most commonly defines liquidity according to two criteria.Financial liquidity can, therefore, be considered in two ways: a) static, i.e. with reference to a particular point using the basic financial statements, such as the balance sheet and profit and loss accounts; b) dynamic, i.e. with reference to a particular reporting period and based on the cash flow statement.The traditional measure of liquidity is based on data received directly from the balance sheet.The ratios are based on the assessment of the relationship of short-term assets to short-term liabilities.a variety of traditional indicators are used to a greater or lesser extent to assess the financial liquidity.Most popular are the current ratio, the quick ratio, and the cash ratio.They are intended to assess the extent to which the company was unable to repay current liabilities from short-term assets.each of these indicators in the numerator include a diverse range of payment means -from the total assets to the most liquid cash.at the same time, the calculation is based on the assessment of the company's financial resources in the past.Indicators calculated for the business are compared with data from previous periods, indicators from other companies, and the socalled standards or normative values.on the other hand, it should not be forgotten that companies operating in various sectors of the economy have different levels of turnover and irregular demand, so it is difficult to set universal standard levels of these indicators.
The current ratio is as follows: Current ratio = Current assets (1) Current liabilities .
Current assets include inventories, receivables, short-term securities, and cash.This indicator allows an assessment of the extent to which the company is able to cover shortterm liabilities from current assets.The normative value of this ratio should be in the range 1.2-2.
Due to the fact that stocks are considered the least liquid of current assets, in order to determine the short-term solvency of a company the quick ratio is often used.It is expressed as follows: Quick ratio = Accounts receivable + Cash equivalents + Cash .
(2) Current liabilities The value of the quick ratio should be kept within the range of 1-1.2. as in the current ratio, the lower value of this indicator may serve as a warning signal suggesting that the company has problems with liquidity.The upper limit may be indicative of the inefficient management of the working capital.
The cash ratio is calculated by using the formula: Cash ratio = Cash equivalents + Cash .
(3) Current liabilities This indicator shows the extent to which the company is able to regulate current liabilities with the most liquid assets including capital.This assumes that the cash should be at least between 16 and 20% of current liabilities.The company would then be able to regulate them efficiently.Although it does not set the standards for this indicator, it is often thought that its value should be between 0.16 and 0.2.The rules of financial management assume that capital should be kept to a minimum because only the assets that are involved in trading can generate adequate financial results.Therefore, in the assessment and management of liquidity described above, the static approach, based on analysing and shaping balances, dominates.This happens in spite of the fact that the essence of liquidity is synchronising streams of cash inflows with streams of cash outflows arising from contractual or statutory deadlines for the settlement of liabilities.a suitable dynamics of streams is thus important.
In the recent years, in economic practice it has been increasingly noted that the indicators based on the resources of the previous reporting period are flawed.They are based on the accounting categories that result from established rules and generally accepted classifications.The nature of accrual and the ability to manipulate these data afford them no real cognitive value.Therefore, the financial liquidity rating based on the cash flow statement seems a better option.Cash-flow provides a counterweight to the accrual method of evaluating the financial state of a company.Knowing the amount of cash that was received and floated is extremely important.A cash-flow statement links the balance sheet and the profit and loss account by using cash as an objective and substantial measure of the effectiveness of the company.It presents the inflows and outflows that occurred during the reporting period, divided into three types of activity: operational, investment, and financial.Financial liquidity can be analysed on the basis of cash-flow streams for the period.Only the statement of revenue and expenditure allows the company to determine the excess cash.
Statements of cash flow, often treated as a complement to the balance sheet and profit and loss account, give Smes new options allowing a comparison of companies independently of the applied accounting convention.It also allows a more complete assessment of the company compared to a more traditional analysis.
In addition to using simple but defective methods of financial analysis, it is worth reaching for tools widely available but rarely used in the financial management of a company.They include quantitative methods.econometric modelling is an innovative and at the same time effective tool, particularly in small businesses, which rarely carries full accounting records or prepares complete financial statements.In this case, it should be emphasised that the effectiveness of the modelling will be determined by the amount of statistical information on the results, as well as on the income and expenditure in the audited company.

The measurement of dynamic liquidity in small businesses
The multitude of financial liquidity measures2 does not mean that it is always possible to use them, especially in SMEs.In the study, financial liquidity is gauged by many different indicator tools.This is usually done in a predetermined measurement period or, if a comparison is the aim, in two periods.The resulting information is, therefore, essentially static, so that it is extremely poor.The main problem is the lack of a relevant statistical information.Keeping simplified accounts in a small business is somewhat complicated, and it deprives managers of the important information that would facilitate the accurate diagnoses of the situation, as a well as rational assessment of the past and the future.
Information collected about the influence of money and the value of ready-made production in a company3 brings many benefits to the owner.It allows, for instance, an approximate account of liquidity.a comparison of amounts of money as the realization of receivables from customers, with the value of the final production4 , gives an accurate picture of the extent of liquidity.Let us give to the symbol cash t the value of the cash inflows, while the value of made production (at retail prices) is prod t .The comparison of the amounts of these variables in a given period allows assessing the current liquidity of the company.The way to compare variable cash t with variable prod t requires consideration.
The first possibility is to compare the values of concurrent cash flows from the production of ready-made value.If cash t ≥ prod t (t = 1, ..., n), this company has the necessary cash to cover liabilities in the period t. a situation where cash t < prod t can mean a shortage of funds.
It is worth noting that the trader, who must rely primarily on his forethought, can collect cash from the periods of surplus over liabilities and use them during the current shortage.a better solution may, therefore, be an analytical examination of the accumulated cash value in subsequent periods of the current year and its comparison with the cumulative value of finished goods.
an alternative measure of the cumulative monthly liquidity is a relative measure of that liquidity for current production, calculated as: (5) The liqproc t variable is expressed in percentage points.It states that the percentage of the production made in the month t is the cumulative monthly financial liquidity.
another variant of the meter liquidity of a small business is the quotient of the cumulative cash inflows and cumulative production value, or an indication of the relative liquidity of the cumulative production ready: (5) ariable is expressed in percentage points.It states the percentage of the production e month t is the cumulative monthly financial liquidity.
other variant of the meter liquidity of small business is the quotient of the cash inflows and cumulative production value, or an indication of the relative f the cumulative production ready: . 100 (6) contains similar resource information as indicator (5).It is expressed as a and also indicates whether the cumulative cash inflows were higher in a given accumulated values results from the assumption of an appropriately cautious owner of a small ollects funds in times of financial surplus for periods of reduced cash inflows.The owner, who does skills to accumulate funds, as a rule, is unable to keep the company in a highly competitive market.t* indicates the number of years, while t was determined by the number of months in the year t*. (6) The indicator (6) contains a similar resource information as the indicator (5).It is expressed as a percentage and also indicates whether the cumulative cash inflows were higher in a given month of the year than the accumulated value of the production completed, and by what percentage they were so.a positive value of liqrel t observation indicates what percentage of the cumulative cash inflows was higher in a given month of the year of the accumulated value of the production done.It means having the ability to settle its obligations in a given month.a negative value liqrel t indicates about the risk of lack of the liquidity, however, it need not always be that way6 .

Measuring the effectiveness of debt collection in small businesses
The production cycle in a company, including batches of products, ends the moment it receives payment for goods sold or services provided.The general practice of granting the trade credit means that after the delivery and invoicing of the goods there is a waiting period for payment that lasts, depending on the industry, from several days to several months.The law forces operators into non-cash payments, making it easier to control the market in the banking system.manufacturers' extending trade credit to their customers means that between the time of delivery and payment for it there is an interval of approximately one month.at the end of that period, payment should be received for the goods sold.In the present business, the dominant terms of payment are in the range of 21-30 days.This means that part of the payment for the invoice was made in the month in which it was presented, part the following month, and in the case of some slight delays the last part would be made two months thereafter 7 .
These facts make it necessary to find differences between the influence of the amounts for goods sold (cash t ) and the value of the gross revenues from the sale of concurrent (sbrut t ) as well as that delayed for one month (sbrut t-1 ) and that delayed for two months (sbrut t-2 ).It is, therefore necessary to consider the following differences:  0 vind is significantly less than zero, it indicates a lack of effective debt re enterprise, even to the extent that it might threaten its viability.
A measure of the efficiency of debt recovery (evindt) will be the arithmetical a specific measures of the effectiveness of recovery: evindt = (vind0t + vind1t + vind2t)/3.Evindt, a variable, characterised by a moving average will be typified by a dispersion than the detailed measures of the effectiveness of recovery.

Monthly liquidity and the efficiency of debt collection of company REX
Here we shall present the individual case of a small industrial com liquidity and efficiency of debt collection were subject to a dynamic analysis.W measures of the effectiveness of recovery it is possible to analyse the si assessment of fluctuations in size.It gives the manager an idea about sizes of c given periods.Figure 1 presents the variations in measures of effective debt REX, a small manufacturing company.The appropriate scaling of each chart va of the measures allows a precise assessment of the effectiveness of activi conversion of receivables into cash. 9The t* symbol was designated number of years, and n* indicates the number of years under con  0 vind is significantly less than zero, it indicates a lack of effective debt rec enterprise, even to the extent that it might threaten its viability.
A measure of the efficiency of debt recovery (evindt) will be the arithmetical av specific measures of the effectiveness of recovery: evindt = (vind0t + vind1t + vind2t)/3.Evindt, a variable, characterised by a moving average will be typified by a m dispersion than the detailed measures of the effectiveness of recovery.

Monthly liquidity and the efficiency of debt collection of company REX
Here we shall present the individual case of a small industrial com liquidity and efficiency of debt collection were subject to a dynamic analysis.Wit measures of the effectiveness of recovery it is possible to analyse the sim assessment of fluctuations in size.It gives the manager an idea about sizes of ch given periods.Figure 1 presents the variations in measures of effective debt REX, a small manufacturing company.The appropriate scaling of each chart var of the measures allows a precise assessment of the effectiveness of activiti conversion of receivables into cash. 9The t* symbol was designated number of years, and n* indicates the number of years under cons was positive.If, however, fective recovery should manifest itself close to zero values of the vind0t indicator in the periods t (t = 1, ..., n).The total value of the indicator   12 1 t t 0 vind in year t* (t*= 1, should be close to 0. This means that receivables for goods sold and services provided ansformed into cash.It can not expect that   12 1 t t 0 vind was positive.If, however, t 0 is significantly less than zero, it indicates a lack of effective debt recovery in the se, even to the extent that it might threaten its viability. ure of the efficiency of debt recovery (evindt) will be the arithmetical average of the measures of the effectiveness of recovery: evindt = (vind0t + vind1t + vind2t)/3.(10) a variable, characterised by a moving average will be typified by a much smaller on than the detailed measures of the effectiveness of recovery.

thly liquidity and the efficiency of debt collection of company REX
ere we shall present the individual case of a small industrial company whose and efficiency of debt collection were subject to a dynamic analysis.With time series s of the effectiveness of recovery it is possible to analyse the simplest visual ent of fluctuations in size.It gives the manager an idea about sizes of changes within eriods.Figure 1 presents the variations in measures of effective debt collection in small manufacturing company.The appropriate scaling of each chart variation of any measures allows a precise assessment of the effectiveness of activities aimed at ion of receivables into cash.
ymbol was designated number of years, and n* indicates the number of years under consideration.. 0 t is significantly less than zero, it indicates a lack of effective debt recovery in the enterprise, even to the extent that it might threaten its viability.
A measure of the efficiency of debt recovery (evind t ) will be the arithmetical average of the specific measures of the effectiveness of recovery: evind t , a variable characterised by a moving average, will be typified by a much smaller dispersion than the detailed measures of the effectiveness of recovery.

Monthly liquidity and the efficiency of debt collection of company REX
Here, we shall present an individual case of a small industrial company whose liquidity and efficiency of debt collection were subject to a dynamic analysis.With time series measures of the effectiveness of recovery, it is possible to analyse the simplest visual assessment of fluctuations in size.It gives the manager an idea about the sizes of changes within given periods.Figure 1 presents the variations in measures of an effective debt collection in ReX, a small manufacturing company.The appropriate scaling of each chart variation of any of the measures allows a precise assessment of the effectiveness of activities aimed at the conversion of receivables into cash.
another analytical opportunity is created by the basic statistical characteristics of the measures of the effectiveness of recovery.Table 1 presents the measures of average, dispersion, skewness and concentration variables VIND0 t , VIND1 t and VIND2 t, as well as EVIND t .each of these variables oscillates.Their nature determines that they should fluctuate around the number 0. Their arithmetical mean should, therefore, be close to zero, and in practice it is slightly less than zero.a left asymmetry in the distribution of the measure of liquidity, with a few cases of negative values in the liq t variable (7 cases in 132 months), suggests a good management of financial liquidity within the company.
The average values of recovery efficiency are slightly less than zero.They range from -1667 to -2613 zlotys, respectively.This allows the conclusion that the conversion of debts into cash was efficient.These figures should be compared with the average monthly values of the gross revenues from sales and cash receipts, which amounted to 164.721 and 163.055 zloty respectively.The average value of the WIND0 t variable,   Source: Own calculations based on data from REX amounting to 1.667 zlotys, denotes the size of the gross sales revenues that have not been converted into cash.It sets the scale of the losses caused by dishonest debtors.Statistically, this amount is insignificant.In contrast, the sum of the wind0 t variable, which is -219.9thousand zlotys, gives the full amount of lost by the company in debts in the years between 1996 and 2006.Figure 3 presents the variations of the EVIND t variable in the REX company.Figure 4 shows the structure of the meter.An interesting characteristic of that distribution is left-skewness, indicating a correct (effective) debt collection.From the empirical model, we see that first-order autoregression is particularly important for the REX liquidity At the same time, the efficiency of debt recovery has a significant benefit on the size of the monthly liquidity of the company.The value of the measure of recovery delayed by 1, 3, and 11 months has a negative impact on the liquidity of the company.This points to the need for an effective action in the current business sales team in order to obtain a prompt payment for goods sold.Delays in the repayment of debt by trading partners, even of just one month, have the effect of reducing the financial liquidity of the company.
The empirical model also reveals the periodic fluctuations of liquidity, indicating that negative deviations from the systematic component appear in January, may, June, July, September, and october.The largest negative deviation of liquidity occurs in January and the smallest in June.The measures indicating the accuracy of the model's description of the financial liquidity suggest that it is extremely accurate because 81% of the variation result from the explanatory variables included in the equation.In this model, there is no autocorrelation of the random component, while it is present in Durbin and Watson's empirical statistics (DW = 2.027).The actual values of liquidity differ from the theoretical values calculated via the empirical model of the average of only about 42.8 thousand PLN per month.Figure 5 presents an accurate description of the volatility of liquidity on the example of the current model and the rest of them.

Conclusions
The monitoring of liquidity in a small enterprise increases the operational security by reducing the risk of bankruptcy.an effective debt collection plays the fundamental role in maintaining liquidity at the necessary level.The treatment and the control mechanism for debt collection, presented in this work, should be used in small businesses in order to improve the quality of financial management.A systematic collection of statistical information is, however, needed on the size of production in the triad: ready production, sales revenue, and cash inflows.Such a resource would enable the analysis and diagnosis of the situation in the company in the past periods and may save the owner the amount of lost liability.
Source: Own calculations based on data from REX

Conclusions
The monitoring of liquidity in small enterprise increases operational security by reducing the risk of bankruptcy.Effective debt collection plays a fundamental role in maintaining liquidity at the necessary level.The treatment and the control mechanism for debt collection presented in this work should be used in small businesses in order to improve the quality of financial management.A systematic collection of statistical information is, however, needed on the size of production in the triad: ready production, sales revenue and cash inflows.Such a resource would enable analysis and diagnosis of the situation in the company in past periods and may save the owner the amount of lost liability.
Having a type 1 liquidity and type 3 effectiveness measure of recovery facilitates the appraisal of potential threats to the company's financial system.This will indicate periods of lower liquidity and poorer effectiveness of recovery, which need extraordinary measures to protect the financial system.Having the type 1 liquidity and the type 3 effectiveness measure of recovery facilitates the appraisal of potential threats to the company's financial system.This will indicate the periods of a lower liquidity and a poorer effectiveness of recovery, which need extraordinary measures to protect the financial system.
a complementary packet of information about the empirical econometric models, both describing the efficiency of debt recovery mechanism and explaining the impact of the recovery of financial liquidity, would serve for a precise knowledge of the financial system in the company.Such models also provide the possibility to estimate the respective forecasts.
t* (t*= 1, ..., n*) 8 should be close to 0. This means that receivables for goods sold and services provided were transformed into cash.It cannot expect that 9 Fully effective recovery should manifest itself close to zero values of the vind0 each of the periods t (t = 1, ..., n).The total value of the indicator  , n*) 9 should be close to 0. This means that receivables for goods sold and servi were transformed into cash.It can not expect that 

FIG. 1 . 10 FIG
FIG.1.Cumulative monthly liquidity for REX between 01.1996 and 12.2006 (in thousands PLN) Source: own calculations based on data from the REX the company.

FIG. 2 .
FIG. 2. The structure of the monthly value of the variable liqt of REX between 1996 and 2006 (in thousand PLN)Source: own calculations based on data from the REX.

FIG. 2 .
FIG.2.The structure of the monthly value of the variable liqt of REX between 1996 and 2006 (in thousand PLN)

FIG. 3 .
FIG. 3. The effectiveness of debt recovery (EVINDt) in REX payable monthly in the years between 1996 and 2006 (in thousand PLN)Source: own calculations based on data from the REX company.

FIG. 5 .
FIG. 5.The actual and the theoretical values of monthly financial liquidity of the REX calculated by using the model (8) and the rest 10 of the model (u lq ) Source: own calculations based on data from the REX company.
vind2 t = cash t -sbrut t-2 .(9) a fully effective recovery should manifest itself close to zero values of the vind0 t indicator in each of the periods t (t = 1, ..., n).The total value of the indicator 9 Fully effective recovery should manifest itself close to zero values of the vind each of the periods t (t = 1, ..., n).The total value of the indicator 

Table 1 .
Statistical characteristics of the efficiency measures in the debt collection in REX