Liquidity management practices in SMEs in the IT service industry - A case study

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School of Business | Master's thesis
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PURPOSE OF THE STUDY The purpose of this study is to examine and describe how small and medium-sized companies manage their liquidity in practice. The study is constructed around three areas of liquidity management: cash management, working capital management and cash flow forecasting. One of the objectives of this study is to test theoretical models and methods related to the aforementioned areas and examine whether small and medium-sized companies actually use these models and methods in their liquidity management. Additionally, this study evaluates these models in terms of how usable and effective they are in practice and how likely it is to meet the theoretical model assumptions in practice. DATA AND METHODS This study is a descriptive case study. The data is collected by using participant observation and interviews of the case company's CEO. In addition, the case company's financial figures and internal reports are used as research data. RESULTS Consistent with prior studies, the findings support the critical role of effective liquidity in small and medium-sized companies. The three main areas highlighted in the theory - cash management, working capital management and cash flow forecasting - seem to be particularly important for the case company, as well. The models and methods presented in literature are not directly used in practice. However, there are several similarities between these theoretical models and models used in the case company. The research results indicate that the theoretical model assumptions are not very realistic to meet on a practical level. However, understanding the models on a theoretical level can be considered valuable for a firm as they offer important insights into model determinants.
Liquidity management, Cash management, Working capital management, Cash flow forecasting