Liquidity Management in Business Organizations 1.0: Research Topic

890330145630 LIQUIDITY MANAGEMENT IN ORGANIZATIONS
Research Topic
Liquidity Management in Business Organizations
1.0 INTRODUCTION
An economic recession affects how organizations manage their liquidity in business. Two kinds
of liquidity are market liquidity and funding liquidity. Market liquidity is the risks that market
liquidity worse by that time want to sell or buy it. Market liquidity has ability to convert financial
assets into cash at current market prices. Next, funding liquidity is the risk when a dealer cannot
support their position and it required to unwind. This risk has ability to convert assets into cash.
Liquidity risk also can happen from the failure to identify changes in market conditions will affect
the capability to liquidate assets quickly with minimum loss in cost
2.0 STATEMENT OF PROBLEM
At this moment, liquidity management in business organization becomes more important. Cash
flow represents lifeblood in an organization. Most failure in business was because of cash flow
problems. Cash flow is necessary in business and how to manage it is the key to success. To
start business often gives people problem in short of cash. Only business that can find the way
to generate cash is able to survive. As cash protect business during unstable times, maximize
business cash flow, attract opportunity to reduce costs.
Efficient liquidity management give most benefit at minimum cost and also give practice in the
direction of improved cash flow to organization. However, still not all organization able to have
effective management in liquidity.
RESEARCHING IN ACCOUNTING AND FINANCE 1

3.0 OBJECTIVE OF THE STUDY
The main objective is to look at how important liquidity management is to organizations. The
following objectives will be explored to:
1) Role of liquidity management in business organizations.
2) The approaches in liquidity management in the employment.
3) Analyze the common problems in liquidity management.

4.0 LITERATURE REVIEW
1. Company’s administrator need to estimate the suitable cash amount for all level of
activity, arrange appropriate time to make payments and collections and do investments
with their high liquidity asset, so that the asset can be converted into cash in case if the
company having short of cash in the future (Kamath et al., 1985; Srinivasan & Kim,
1986).
2. Operating cash flows generate by assets will affect the continuing firm liquidity. It is not
only because of the value of liquidation (Soenen, 1993).
3. Combination of profitability and liquidity in working capital theory makes the goals of
working capital management succeed. If the firms return is too high, it will give problem
to the liquidity of the firm and the pursue of liquidity had a propensity to make the returns
down. (Smith and Begemann 1997).
4. Firms with less current asset will having problem in continuing their operations while if
the current assets is too much, it shows the return on investment for the company is not
in perfect condition. (Horne and Wachowicz, 2000).
5. Since optimum cash levels are influenced by the factors outside the preventive concept
of treasury, the company must think broad and take serious operational decision on how
to maximize the profit opportunities that is available in the cash flow process. This
concept has a relation with monetary theory because transaction and provision is a main
reason in managing cash. In addition, this reason also has an assumption which all the
concept of treasury management is in the good judgment of their terms. (Maseda &
Iturralde, 2001).

6. Capable of forecasting and calculating the current assets and current liabilities will
reduce the risk and unnecessary investment in assets and able to meet any short term
commitments in the business. (Eljelly, 2004).
7. Cash conversion cycle shows the relation between liquidity and profitability. It is more
important to measured profitability compared to if the company is using current ratio
(Eljelly, 2004)
8. Ratio analysis is one of the conventional way that use financial statements to evaluate
the company and create standards that have simply interpreted financial sense (George
H.Pink, G. Mark Holmes 2005).
9. Working capital management will focused more on current assets and current liabilities
as it is a major part in finance and it will affect the profitability and also the liquidity of the
company (Abdul Raheman 2007).
10. Apart from the nature of company, successful liquidity management is a center
responsibility of treasury group. Within a financial institution's treasury, it is dangerous.
Core revenue will generate functions of banks with sufficient levels of liquidity to control.
(Chinmoy Gosh 2009).
11. Here are the methods help to compute liquidity in business organizations. We can
determine how liquid the firm is by using ratio analysis. To find a ratio of current asset to
current liabilities is by current ratio. Quick ratio will permit the firm know whether can
disburse their current debt, exclude to sell any inventory. It's vital for an organization to
concern on this because, if they need to sell inventory, they also need a customer to buy
that inventory. (Chinmoy Gosh 2009).

4.1 STRENGTH AND WEAKNESS OF LITERATURE REVIEWS
The above literature review reveals liquidity management strength and weaknesses. The
strength is will explain precisely important of the topic, better than the written definition of the
word will do. Because of many ideas, literature review can justify our choice through the theory,
conceptual and give background information required to understand the study. The researchers
clearly identified the short term liquidity obligations and profitability of the companies. The
weakness is generally the reviews are out of date and it is applicable only to that period of
study. The researchers need to renew their findings continuously.

5.0 HYPOTHESES
5.1 Null –hypothesis (H0)
1. There is no relationship between the sufficient amount of cash in organizations and
liquidity of the business.
2. No relationship between liquidity and working capital management
5.2 Alternate hypothesis (H1)
1. There is a possible positive relationship because firms with more efficient in managing
their cash are expected to pose low level of liquidity and vice versa.
2. Firms that can control their current assets and current liability to eliminate risk to meet
short term commitments.

6.0 METHODOLOGY
6.1 Research Process

6.2 Collection of data
This research includes both primary and secondary data. This will give sufficient understanding
for the researcher about related issues and the different variables involve in it. The primary data
represent by the survey conducted. Conversely, literature review in this research will represent
as secondary data that come from articles, text books, and journals related to this study.
6.3 Tools and techniques
The following are the tools to analyze the liquidity position of the organizations. Financial ratio
analysis is to analyze how successful the company meet it short term debt. Working Capital will
analyze the cash flow of an organization. SWOT analysis also can investigate the strength and
the weakness of the liquidity management of the organizations.

7.0 SAMPLE DESIGN
7.1 Random sampling design
Three companies are chosen from Malaysia with special reference to food industry. The sample
companies are McDonalds, Kentucky Fried Chicken and Pizza Hut.

8.0 DATA ANALYSIS
8.1 Ratio Analysis
1. Current ratio
This ratio is one of the best identified measures of liquidity strength of the company. Current
ratio is measured by total current assets divide by total current liabilities. Normally, suitable
current ratio is 2 to 1. But, it also depends on the character of the business with current assets &
current liabilities. If the ratio is less than 1 which their current liabilities is more than current
assets, means that the organizations are unable to pay debts when it fall due and will become
insolvent. When current ratio is too low, an organization can raise it by:
 Pay debts
 Convert non current assets become current assets
 Get some profits back into business
 Short term loans and advances from banks and other financial institutions.

2. Quick ratio
This ratio is much challenging measured compared with current ratio. Quick ratio is measured
by current liabilities less with stock and divided by current liabilities. Without include the
inventories, it only focused on liquid assets. 1 to 1 ratio is considered acceptable except the
greater parts of quick assets under accounts receivables that delay the payment of current
liabilities. To be protected, current assets must exceed current liabilities. When the current ratio
is increasing and the quick ratio is still, this suggests a likely stockholding dilemma.
3. Working Capital
Working Capital is to calculate the cash flow than a ratio and the result must be in a positive
number. It can be calculated by total current assets minus total current liabilities. Bankers will
look at Net Working Capital of an organization to conclude the ability to financial crisis on
liquidity. Loans are need to least the working capital requirements.

8.2 SWOT Analysis
SWOT analysis can be used to evaluate company liquidity performance also. The analysis can
suggest ways in which the organization can benefit from strengths and opportunities and defend
itself against weaknesses and threats (Adams, 2005). Strength will focused on organizations
strong liquidation which company ability to forfeit its current liabilities. If the firm has a strong
liquidity, surely they can pay the debt. Weaknesses is the company will become bankruptcy
when they cannot pay the debt whereas need to sell their assets. There will be an opportunity
for an organization in the future because the successful liquidity management requires an
account arrangement that facilitates prompt decisions and simplify transfers among accounts.
Some of the threats in liquidity management are deficit of cash.

The figure above shows the relationship market growth and market share relative to the
competitors.
 Stars defined when there is strong relative in market share, which the generation of cash
also will be large.
 Cash cows show that they are the leaders in a developed share market. When the asset
return is more than market rate, it is meaning that the firm is making cash more than
they usually used.
 Question marks shows that, firm are use many cash in the rising market even they are
produce less cash because of market shares down.
 Dog shows the firm uses less cash even they produce a big amount of cash.

8.3 Comparative Industry Analysis
Industry analysis used to compare the organizations within the same trade which operate the
similar nature of business. Industry analysis between the companies will give good advantage of
the competition in order to find out the strength and weaknesses. This develops a company
liquidity plan that will support the capability with the requirements of the aggressive
environment. Organizations have an optimist competition between them and will work hard to
improve their liquidity performance.

9.0 ESTIMATION OF TIME

10.0 ESTIMATION OF BUDGET
The researcher found that $3000 is for estimation of the budget which includes all inside and
outside researching taking by the researcher for example goes to company to conduct an
interview with people.

11.0 LIMITATIONS
The researcher known that this proposal has the limitations. Data collected through secondary
sources may be outdated. For primary data is more costly and time consuming. All the
information collected need to identify the strength and weaknesses and the limitations of data
analysis apply to the limitations of the study as well.

12.0 CONCLUSION
Liquidity management is very important in business organization. Liquidity risk includes the lack
of ability to control the unexpected decrease or changes in funding sources. The researcher
realizes that all company surviving in manages their cash flows. Effective liquidity management
will reduce the risk in meeting their short term obligation. Organization can monitor their position
of current assets and current liabilities through ratio, SWOT and industry analysis. This research
is very useful to people who want to start a business yet to organizations that now in progress.
WORD COUNT: 1965

REFERENCES
Abdul Raheman 2007. ‘Working Capital Management and Profitability – Case Of Pakistani
Firms’. International Review of Business Research Papers. 3(1), Pp. 279, PDF [Online].
Available at: http://www.eurojournals.com/irjfe_19_15
BCG Growth-Share Matrix [Online Image. Available at:

http://www.netmba.com/strategy/matrix/bcg/
Chinmoy Gosh 2009. ‘Liquidity Management System’ Articles base. 31 March [Online].
Available at: http://www.scribd.com/doc/19232982/Ratio-Analysis-and-Comparitive
Eljelly, 2004. ‘Working Capital Management and Profitability – Case Of Pakistani Firms’.
International Review of Business Research Papers. 3(1), Pp. 280, PDF [Online]. Available
at: http://www.eurojournals.com/irjfe_19_15
George H.Pink, G. Mark Holmes 2005. ‘Financial Indicators for Critical Access Hospitals’.
Flex Monitoring Team Briefing Paper. 7(2005), PDF [Online]. Available at:
www.flexmonitoring.org/.../BriefingPaper7_FinancialIndicators.pdf
Kamath et al., 1985; Srinivasan & Kim, 1986. ‘Treasury Management versus Cash
Management’. International Research Journal of Finance and Economics. 19(2008), Pp.194,
PDF [Online]. Available at: http://www.bizresearchpapers.com/Paper%2019
Maseda & Iturralde, 2001. Srinivasan & Kim, 1986. ‘Treasury Management versus Cash
Smith and Begemann 1997. ‘Working Capital Management and Profitability – Case Of
Pakistani Firms’. International Review of Business Research Papers. 3(1), Pp. 282, PDF
[Online]. Available at: http://www.eurojournals.com/irjfe_19_15
Soenen, 1993. ‘Working Capital Management and Profitability – Case Of Pakistani Firms’.

BIBLIOGRAPHY
Abdul Raheman 2007. ‘Working Capital Management and Profitability – Case Of Pakistani
Firms’. International Review of Business Research Papers. 3(1), Pp. 279, PDF [Online].
Available at: http://www.eurojournals.com/irjfe_19_15
BCG Growth-Share Matrix [Online Image. Available at:

http://www.netmba.com/strategy/matrix/bcg/
Best, J. W. (1970). Research in Education, 2nd Ed. Englewood Cliffs, N.J.: Prentice Hall, Inc.
Chinmoy Gosh 2009. ‘Liquidity Management System’ Articles base. 31 March [Online].
Available at: http://www.scribd.com/doc/19232982/Ratio-Analysis-and-Comparitive
Creswell, J.W. (1994). Research design. Qualitative and quantitative approaches.

Thousand Oaks, California: Sage.
Kamath et al., 1985; Srinivasan & Kim, 1986. ‘Treasury Management versus Cash
Maseda & Iturralde, 2001. Srinivasan & Kim, 1986. ‘Treasury Management versus Cash
Net MBA (2010). The BCG Growth-Share Matrix. Available at:

ww.netmba.com/strategy/matrix/bcg/
Osmond Vitez (2010). What is Industry Analysis? Available at:

http://www.ehow.com/about_5415105_industry-analysis.html (Accessed on 15 July).

QFINANCE (2009). Liquidity Ratio Analysis. Available at: http://www.qfinance.com/cash-

flow-management-calculations/liquidity-ratio-analysis (Accessed on 15 July)
Saunders, M., Lewis, P. and Thornhill, A. (2003). Research Methods for Business Students,
3rd Ed. London: Prentice Hall Financial Times
Smith and Begemann 1997. ‘Working Capital Management and Profitability – Case Of
Pakistani Firms’. International Review of Business Research Papers. 3(1), Pp. 282, PDF
[Online]. Available at: http://www.eurojournals.com/irjfe_19_15
Soenen, 1993. ‘Working Capital Management and Profitability – Case Of Pakistani Firms’.
Zero Million (2009). Financial Ratio Analysis. Available at:

http://www.zeromillion.com/business/financial/financial-ratio.html (Accessed on 15 July)

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890330145630 LIQUIDITY MANAGEMENT IN ORGANIZATIONS

Liquidity Management in Business Organizations

the capability to liquidate assets quickly with minimum loss in cost

2.0 STATEMENT OF PROBLEM

business cash flow, attract opportunity to reduce costs.

effective management in liquidity.

RESEARCHING IN ACCOUNTING AND FINANCE 1

3.0 OBJECTIVE OF THE STUDY

following objectives will be explored to:

1) Role of liquidity management in business organizations.

2) The approaches in liquidity management in the employment.

3) Analyze the common problems in liquidity management.

RESEARCHING IN ACCOUNTING AND FINANCE 2

4.0 LITERATURE REVIEW

only because of the value of liquidation (Soenen, 1993).

down. (Smith and Begemann 1997).

in perfect condition. (Horne and Wachowicz, 2000).

RESEARCHING IN ACCOUNTING AND FINANCE 3

commitments in the business. (Eljelly, 2004).

important to measured profitability compared to if the company is using current ratio

H.Pink, G. Mark Holmes 2005).

company (Abdul Raheman 2007).

responsibility of treasury group. Within a financial institution's treasury, it is dangerous.

(Chinmoy Gosh 2009).

that inventory. (Chinmoy Gosh 2009).

RESEARCHING IN ACCOUNTING AND FINANCE 4

4.1 STRENGTH AND WEAKNESS OF LITERATURE REVIEWS

study. The researchers need to renew their findings continuously.

RESEARCHING IN ACCOUNTING AND FINANCE 5

5.1 Null –hypothesis (H0)

1. There is no relationship between the sufficient amount of cash in organizations and

liquidity of the business.

2. No relationship between liquidity and working capital management

5.2 Alternate hypothesis (H1)

short term commitments.

RESEARCHING IN ACCOUNTING AND FINANCE 6

6.1 Research Process

RESEARCHING IN ACCOUNTING AND FINANCE 7

6.2 Collection of data

6.3 Tools and techniques

the weakness of the liquidity management of the organizations.

RESEARCHING IN ACCOUNTING AND FINANCE 8

7.0 SAMPLE DESIGN

7.1 Random sampling design

companies are McDonalds, Kentucky Fried Chicken and Pizza Hut.

RESEARCHING IN ACCOUNTING AND FINANCE 9

8.0 DATA ANALYSIS

8.1 Ratio Analysis

 Convert non current assets become current assets

 Get some profits back into business

RESEARCHING IN ACCOUNTING AND FINANCE 10

liquidity. Loans are need to least the working capital requirements.

RESEARCHING IN ACCOUNTING AND FINANCE 11

8.2 SWOT Analysis

Some of the threats in liquidity management are deficit of cash.

RESEARCHING IN ACCOUNTING AND FINANCE 12

also will be large.

they usually used.

produce less cash because of market shares down.

RESEARCHING IN ACCOUNTING AND FINANCE 13

8.3 Comparative Industry Analysis

improve their liquidity performance.