Determinants of liquidity
| Macroeconomic factors | Industry factors | Microeconomic factors |
|---|---|---|
| Government monetary policy: | The degree of development of the industry and level of risk: | The company's market position and pricing strategy: |
Impact of the business model defining factors on the liquidity of the company
| The defining factor of the business model | Factor's explanation | Impact on liquidity |
|---|---|---|
| Value | Determines the value of the product generated for the customer. | The higher the value of the product to the customer, the greater the chance of higher sales, i.e., increased cash inflow. |
| Revenues | Defines the way the business will make money. | At this point, the possibility of granting trade credit and collecting receivables, as well as acceptable forms of payment – i.e., the company's underlying cash inflow schedule – should be determined, as these directly translate into a liquidity strategy. |
| Entry barrier | Identifies the initial expenditure required to start the business. | The amount of the initial contribution determines the amount of funds required to be invested, i.e., the amount of capital frozen at the outset, which can still be increased in the subsequent operation of the company, so a high barrier to entry will in principle limit the liquidity of the business entity. |
| Competition | Makes it possible to assess the threat from competing companies. | The higher the competition, the more likely it is that sales will be spread over more operators, i.e., access to outlets and thus to regular, larger supplies of cash will be restricted. |
| Competitive advantage | Identifies in which areas/characteristics the company in question is better than its competitors, and what kind of value-added it brings to the market compared to its competitors. | When an entity significantly differentiates itself from its competitors with the solutions it offers, it finds it easier to win new customers and therefore has a greater likelihood of increasing sales revenue, and this should have a positive impact on liquidity. |
| Market strategy | This defines how to promote the company and how to choose the right marketing activities. | The amount of money spent on marketing and how and at what rate new customers are acquired is important in terms of both increasing sales revenue and generating promotional costs. |
| Structure/development of the organisation | Identifies the size, staffing structure, and fixed costs of maintaining the business. | The more extensive the organisational structure, the greater the maintenance costs it generates, as well as requiring a much more restrictive and automated cash flow planning process. |
| Management | Defines the adopted management model and the required competencies of the chief executive. | The management approach adopted by managers directly defines the approach to controlling liquidity. Keeping the best professionals in the market within the company will also generate fixed costs of a certain amount, which will need to be factored into the budget. |
Comparison of the characteristics of a company with sufficient and insufficient liquidity levels
| Characteristics | Sufficient level of liquidity | Insufficient liquidity level |
|---|---|---|
| Credibility | Full credibility, no reputational risk. | High risk of losing credibility or losing it altogether with further negative consequences. |
| The cost of financing | Market cost, or even reduced cost due to advantageous negotiated contractual terms with long-term financing partners or preferential credit terms. | Increased due to higher credit risk and the withdrawal of lenders from existing contracts or lack of further support. |
| Relationship with suppliers | High flexibility in financing, continuous use of discounts, submitted invoice payment terms (trade credit). | Lack of flexibility, applying for deferment of repayment dates by the entrepreneur in the face of demands for immediate repayment, lack of additional price reductions and discounts. |
| Deadline and amount of expenditure incurred | Cash reserves coincide in size and timing with liability payment dates. | No favourable relationship between the amount and timing of liabilities and the level of cash reserves. |
Results of the dynamic panel models on liquidity in the fashion sector
| model 1 cash_TA Coeff. (Std. Err.) | model 2 cash_ratio Coeff. (Std. Err.) | |
|---|---|---|
| Lagged dependent variable | 0.0905 *** | 0.0969 *** |
| (0.0229) | (0.0022) | |
| covid | 0.0128 *** | −0.7195 *** |
| (0.0047) | (0.0673) | |
| fashion | −0.2843 ** | −18.4016 *** |
| (0.1250) | (1.5096) | |
| did | 0.0070 | 1.0736 *** |
| (0.0060) | (0.1640) | |
| size | −0.0134 ** | 1.3738 *** |
| (0.0069) | (0.0788) | |
| profit | −0.0050 | 1.3628 *** |
| (0.0081) | (0.0632) | |
| mktbk | 0.0069 *** | 0.5421 *** |
| (0.0015) | (0.0101) | |
| growth | 0.0231 *** | 2.6130 *** |
| (0.0045) | (0.0648) | |
| capex | −0.1537 *** | −6.8916 *** |
| (0.0415) | (0.6435) | |
| totaldebt_TA | −0.1788 *** | −7.7793 *** |
| (0.0207) | (0.2128) | |
| inf_growth | −1.2522 *** | |
| (0.3721) | ||
| growthrate | −0.3886 | |
| (0.6217) | ||
| maxcredit | 0.6720 *** | |
| (0.0626) | ||
| situation_capital | 1.2641 *** | |
| (0.1040) | ||
| risk_sector | −1.0935 *** | |
| (0.1940) | ||
| industry | 0.0829 *** | −1.4661 *** |
| (0.0158) | (0.1877) | |
| quartal | 0.0002 | −0.0522 *** |
| (0.0010) | (0.0122) | |
| number of observations | 885 | 684 |
| number of companies | 108 | 93 |
| Wald test | 646.80 | 154607.69 |
| p-value | 0.0000 | 0.0000 |
| Sargan test | 51.6697 | 60.2655 |
| p-value | 0.2964 | 0.0636 |
| Arellano-Bond test | ||
| AR(1) | −2.7961 | −1.6693 |
| p-value | 0.0052 | 0.0951 |
| AR(2) | 0.7980 | −1.1499 |
| p-value | 0.4248 | 0.2502 |
Variables definitions
| Variable | Definition |
|---|---|
| cash_TA | The dependent variable expressed as the ratio of available cash and cash equivalents to total assets in the company (similar to cash holding or cash reserves). |
| cash_ratio | The dependent variable expressed as the ratio of cash and cash equivalents to trade payables, after winsorisation of extreme observations at the 95th percentile, due to excessive kurtosis |
| covid | The binary variable takes the value zero from the first quarter of 2019 to the first quarter of 2020 (before the COVID-19 pandemic) and the value of one from the second quarter of 2020 to the end of the observation period (when the effects of the pandemic were already visible in companies’ financial statements). |
| fashion | The binary variable indicates whether the company belongs to the fashion industry (according to the rules adopted by the Warsaw Stock Exchange). |
| did | Interaction of covid and fashion variables. |
| size | The size of a company's assets is presented as the natural logarithm of its total assets. |
| profit | The variable shows the ratio of operating profit before depreciation and amortisation (EBITDA) to total company assets. |
| mktbk | The variable determines the ratio of the market value to the book value of the company, so it tells whether the company is developing (growing) and at the same time informs about the confidence level of investors in the given company. |
| growth | The change in total assets, measured as the difference between ln(1+totalassets) from period t and ln(1+totalassets) a of period t-1, where t means quarter. |
| capex | The variable indicates the ratio of the company's capital expenditure to the company's total assets. |
| totaldebt_TA | The variable indicates ratio of total debt to total assets. |
| inf_growth | The variable measuring the inflation expectation, based on analyses of the National Bank of Poland. It measures the percentage of enterprises that are convinced that prices will rise faster than current inflation over the next 12 months. |
| growthrate | GDP quarter-on-quarter growth rate |
| maxcredit | The maximum amount of a loan/line of credit, an indicator calculated on the basis of commercial banks’ responses to the question to what extent the terms and conditions for granting loans or lines of credit to businesses have been changed in the past three months. A positive indicator indicates a tightening of this criterion. |
| situation_capital | The reason for credit policy change: current or expected capital position of the bank, percentage of commercial banks’ responses to the question whether they have changed their credit policy, that is, the criteria or conditions for granting loans/credit lines to businesses, in the last three months and how the mentioned factor has contributed to the change. A positive indicator shows that a factor has contributed more to an easing than to a tightening of credit policy. |
| risk_sector | The impact of the industry risk contribution to the change in credit policy within the last three months. A negative indicator means that a factor contributed more to the tightening than to the easing of credit policy. |
| industry | Identifies the dominant industry in which the company operates, in accordance with the Polish classification of PKD codes. |
| quartal | Identifies the quarter under review during the analysis period. |
Descriptive statistics
| Variable | Obs | Mean | Std. Dev. | Min | Max |
|---|---|---|---|---|---|
| covid | 8,679 | 0.5455 | 0.4980 | 0 | 1 |
| fashion | 8,679 | 0.0266 | 0.1610 | 0 | 1 |
| did | 8,679 | 0.0145 | 0.1196 | 0 | 1 |
| size | 8,679 | 13.8866 | 7.9387 | 0 | 40.9197 |
| profit | 6,688 | 0.0164 | 0.1345 | −0.66 | 0.55 |
| mktbk | 6,688 | 1.8313 | 2.9573 | −0.9079 | 12 |
| growth | 7,89 | −1.3996 | 5.9861 | −40.9197 | 23.3957 |
| capex | 6,688 | 0.0147 | 0.0281 | 0 | 0.173 |
| totaldebt_TA | 6,688 | 0.5355 | 0.3369 | 0 | 44682,00 |
| inf_growth | 8,679 | 0.4832 | 0.0489 | 0.417 | 0.572 |
| growthrate | 8,679 | 0.0069 | 0.0372 | −0.092 | 0.076 |
| maxcredit | 8,679 | −0.1187 | 0.1875 | −0.5651 | 0.1596 |
| situation_capital | 8,679 | −0.0577 | 0.0963 | −0.257 | 0.1244 |
| risk_sector | 8,679 | −0.2214 | 0.1851 | −0.7089 | −0.046 |
| industry | 8,679 | 7.8973 | 4.2902 | 1 | 18 |
| quartal | 8,679 | 6 | 3.1625 | 1 | 11 |