ACCOUNTS RECEIVABLE
LEVELS AS PART
LIQUIDITY MANAGEMENT
STRATEGY IN POLISH
NONPROFIT
ORGANIZATIONS
Grzegorz Michalski
Wroclaw University of Economics
2016-03-18
ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS
ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH
NONPROFIT ORGANIZATIONS

Liquidity Strategies NonProfit
Organizations: Polish NonProfits Case
 During
the liquidity management
we have various levels of
operating risk:
—Higher in more risky strategies cases
—Smaler in less risky cases
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ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS
Working capital strategies: liability based perspective

Aggressive strategy: minimalization of long term financing
— Comparatively smaller cost of interests (interests from long term debt are more
expensive than from short term debt. In the aggressive strategy there is
maximization of short term debt in place of long term debt.
— But short term debt is more risky way of financing – it is linked with higher level of
individual risk, that cause the cost of capital rates growth.
— Higher cost of capital rate causes smaller economic efficiency growth (firm value
growth) because financial costs consume operating results of the organization.
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ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS
Working capital strategies: liability based perspective

Conservative strategy: minimalization of risk by maximization of long term
financing (maximizing share of long term debt in total debt)
— Use of Long term debt in debt rather than short term debt is less risky way of
financing – it is linked with smaller level of individual risk, that will make smaller
the cost of capital rates.
— Smaller cost of capital rate causes higher economic efficiency growth (firm value
growth).
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ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS
ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS
Working capital strategies: assets based perspective
 Restrictive
strategy:
—Managing team uses most risky but the ‘cheapest’
solution: the smallest as possible, level of liquid assets
—Use of small level of current assets is cheaper from
operating point of view (smaller ‘visible’ operating costs
of holding and managing current assets).
—But generaly it is more risky way what cause higher
costs of financing – it is linked with higher level of
individual risk, that will make higher the cost of capital
rates.
—Higher cost of capital rate causes smaller economic
efficiency growth (smaller firm value growth).
ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS
Working capital strategies: assets based perspective
 Flexible
strategy:
—Managing team uses more expensive but less risky
solution: the sufficient to cover whole operating risk of
lack of current assets high as possible, level of liquid
assets
—Use of high level of current assets is more costly from
operating point of view (higher ‘visible’ operating costs
of holding and managing current assets).
—But generaly it is less risky way what cause smaller
costs of financing – it is linked with smaller level of
individual risk, that will make smaller the cost of
capital rates.
—smaller cost of capital rate causes higher economic
efficiency growth (higher firm value growth).
ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS
ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS
Higher risk in more risky liquidity strategies cases
 Aggressive
(large short term debt portion in debt) liquidity
financing strategies
 Restrictive
(small current assets in relation to CR cash
revenues) liquidity investment strategies

they results with higher individual risk ->> higher risk need
higher cost of financing for organization ->> higher cost of
financing eats larger part of economic results
the organization than in less risky cases
 Cost
of financing = Cost of own fund ((E/(D+E))*ke) + cost of
debt ((Dl/(D+E))*kDl+(Ds/(D+E))*kDs)
kDs = f(D/E,5c,…); kDl = f(D/E,5c,…); kE = kRF + beta (km – kRF)
beta*L = f(betaU, D/E, SZ, CZ, other individual risk factors,…)
 Economic
results = free cash flows / cost of financing
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ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS
Smaller risk in less risky liquidity strategies cases
 Conservative
(large long term debt portion in debt)
liquidity financing strategies
 Flexible
(large current assets in relation to CR cash
revenues) liquidity investment strategies

they results with smaller individual risk ->> smaller risk need
higher cost of financing for organization ->> smaller cost
of financing consumes smaller part of
economic results the organization
 Cost
of financing = Cost of own fund ((E/(D+E))*ke) + cost of
debt ((Dl/(D+E))*kDl+(Ds/(D+E))*kDs)
kDs = f(D/E,5c,…); kDl = f(D/E,5c,…); kE = kRF + beta (km – kRF)
beta*L = f(betaU, D/E, SZ, CZ, other individual risk factors,…)
 Economic
results = free cash flows / cost of financing
ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS
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Organizations risk sensitivity

Depending on organization there are various levels of risk sensitivity depending on
individual organization situations.

More sensitive organizations (with more sensitive individual risk factors: CZ, SZ) rather
should to choose less risky strategies, nearer to flexible and conservative solutions

Less sensitive organizations (with less sensitive individual risk factors: CZ, SZ) rather
should to choose cheaper but also more risky strategies, nearer to restrictive and
aggressive solutions
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ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS
ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS
ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS
ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS
ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS
NonProfit organizations aim

The nonprofit organizations aim differ to for profit organizations case

Managing teams of nonprofits should in first to realize the mission of
the organization

The economic results are also very important as a helpful factor to
stronger and more widely influence of the mission realized by wisely
use of money from the donnors

How about the risk?
— Risk taken by the nonprofit organizations should be rather small, it cannot
to danger the mission realization
— Nonprofits should rather use conservative and flexible solutions than
aggressive and restrictive:

Flexible investment in liquid assets strategy

Conservative financing liquid assets strategy
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ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS
Flexible AR policy

Theoreticaly aimed on realization of the mission nonprofit organizations,
should to choose more safe and more flexible accounts receivable policies.
But in fact they are rather aggressive / restrictive
Receivables conversion period and other short-term characteristics in Polish nonprofit organizations in
2009
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ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS
For-profit case

Short-term receivables, other short-term levels, receivables conversion period and other short-term
characteristics in Polish for-profit organizations in 2009-2010
Accounts receivable period winsorized mean in Polish
nonprofit organizations for 2009 & 2010 data is 13,82 days,
the adequate level for for-profit Polish firms is three times
longer and take 50,4 days.
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ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS
conclusions
 According
to data received from over 3000 Polish NPOs, the
average NPO investment in accounts receivables is more
aggressive than in similar for profit organizations.
 Accounts
receivable period in Polish nonprofit organizations
is shorter than adequate periods in for-profit Polish
organizations. That shows that they generally can use rather
aggressive than flexible idea of accounts receivable
management. It’s more risky solution.
 That
observation suggest us that here, in Polish NPO case we
have small risk exposition or rather smaller aversion of
managing teams? Unfortunately rather the second.
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ACCOUNTS RECEIVABLE LEVELS AS PART LIQUIDITY MANAGEMENT STRATEGY IN POLISH NONPROFIT ORGANIZATIONS