Microeconometrics in Business Management

5 Econometric modeling in management of small-sized enterprise

5.1 The concept of financial liquidity and its measurement in a small-sized enterprise

Financial liquidity of an enterprise is fundamental for its viability and development.¹ Liquidity plays a particular role in a small-sized enterprise, which during the time of transformation in Poland faced the banks and their reluctance to grant credit, which is a liquidity buffering tool. As such, financial liquidity of a small-sized enterprise depends on the company’s ability to sell its products and to execute liabilities for the goods and services sold. Possible cash shortages are rarely complimented by bank loans. Typically, such supplementation comes from own funds of the company’s owner and of his family, including the amounts accumulated earlier on as a result of having the so-called periodical excess financial liquidity.

Manufacture of the goods for sale requires possession of necessary cash funds,² which in turn come from the sale of the goods for which payment has been made, at the same time closing the circular cycle of capital.⁴ Production of the goods allows their delivery to the customers, which results in issuance of adequate invoices creating the receivables. After the time specified in an agreement, payment for the goods sold follows. This enables initiation of the next production cycle. The mechanism described here is presented in Figure 5.1.

Figure 5.1 The links between cash inflows, gross sales income, ...