New Framework in Liquidity Management: Effective Working Capital Investment - German Firms Case

Abstract

Effectiveness of working capital investments is only one from possible explanations of working capital levels in firms. Too small working capital leads some firms to negative changes in their sale levels. Destruction of cash revenues creation possibilities is dangerous for them and is hard to rebuild possibilities to create cash revenues. Financial liquidity investment efficiency model (FLIEM) predicts that before the crisis, during the crisis and after the crisis phases are connected with higher levels of working capital in processing enterprises. Investments in working capital levels are a hedging instrument against individual risk sensitivity that is higher in crisis affected times. The paper aim is to compare real economy data with FLIEM predictions. The FLIEM model expected that working capital to total assets indicator should be treated as forecasting indicator about future risk sensitivity of the entities. It could be also suitable as forewarning impulse of future standing of whole processing part of economy.

Keywords: working capital management, entrepreneurial liquidity, business environment, current assets, risk management

JEL Classification: D92, E44, G00, G01, Q14