Factors influencing treasurers’ choices.

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Factors influencing treasurers’ choices.

An in depth focus on the playing field of treasurers;

concerning the decision making of cash surpluses.

Thesis

Master International Financial Management University of Uppsala

&

University of Groningen Faculty of Economics and Business

Author: Sabine Roex Student number: 134650

Supervisor Uppsala University: R. Joachimsson.

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EXECUTIVE SUMMARY

Within a company the treasury department is the department where all the cash flows are being monitored, controlled and managed. These cash flows can be; in- and out-flows, cash balances, working capital, and so on. The treasurer is responsible for the management of these cash flows and needs to take a tremendous amount of restrictions, requirements and

regulations into account. Within many (multinational) companies there are so many cash streams to manage that sometimes cash surpluses are not even identified and used.

Within this research the cash (surplus) management process is investigated; from the identification of cash surpluses to the investment of them. The aim is to identify the factors within this process that influence the playing field of the treasurer. Therefore, the three main sub-processes (cash flow forecasting process, investment process, market analysis process) within this cash surplus management process will be investigated, and relationships between them will be analyzed.

Within this study thirty Swedish multinational firms were investigated, by the use of a questionnaire. This English written questionnaire consisted of twenty-one closed questions and one open non-obligatory question. This was done in order to make participation more attractive for the tough target group; treasurers and financial managers. The findings were analyzed by use of a bivariate correlation analysis.

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TABLE OF CONTENTS

EXECUTIVE SUMMARY 1

TABLE OF CONTENTS 2

TABLES AND FIGURES 5

TABLES 5

DEFINITIONS AND ABBREVIATIONS 6

1.1 INTRODUCTION 7

1.2 OBJECTIVE 8

1.3 PROBLEM STATEMENT 9

1.4 CONTRIBUTION 9

1.5 THESIS OUTLINE 10

CHAPTER 2 LITERATURE REVIEW 11

2.1 INTRODUCTION 11

2.2 IDENTIFICATION OF CASH SURPLUS 12

2.2.1 Introduction 12

2.2.2 Literature review 12

2.2.3 Definitions 13

2.2.4 Explanation of the involved processes 14

2.2.5 Conclusion 18

2.3 INVESTMENT POSSIBILITIES 18

2.3.4 Explanation of the involved processes 21

2.4 MARKET POSSIBILITIES AND REGULATORY RESTRICTIONS 24

2.4.4 Explanation of involved processes 26

2.5 SUMMARY LITERATURE REVIEW 28

2.6 HYPOTHESES BUILDING 29

2.5.1 Introduction 29

2.5.2 Identification of cash surplus. 29

2.5.3 Investment possibilities 30

2.5.4 Market possibilities and regulatory restrictions 31

2.5.5 Overall cash surplus management process 33

CHAPTER 3 RESEARCH DESIGN AND METHODOLOGY 34

3.1 INTRODUCTION 34

3.2 KNOWLEDGE COLLECTION 34

3.2.2 Literature research 34

3.2.3 Practical expert knowledge 34

3.3 QUESTIONNAIRE FORMATTING 35

3.3.2 Questionnaire focus 35

3.3.3 Questionnaire phraseology 36

3.3.4 Form of response 38

3.3.5 Question sequencing and overall presentation 39

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3.4.2 Identification of cash surplus 40

3.5 DATA COLLECTION 44 3.5.1 Introduction 44 3.5.2 Choice of companies 45 3.5.3 Cooperation participants 46 3.6 VALIDITY SOURCES 47 3.6.1 Introduction 47 3.6.2 Literature 47 3.6.3 Questionnaires 48

CHAPTER 4 EMPIRICAL RESULT PRESENTATION AND ANALYSIS 49

4.1 INTRODUCTION 49

4.2 IDENTIFICATION OF CASH SURPLUS 49

4.2.1 Hypothesis 1A. 49 4.2.2 Hypothesis 1B 52 4.3 INVESTMENT POSSIBILITIES 54 4.3.1 Hypothesis 2A 55 4.3.2 Hypothesis 2B 57 4.3.3 Hypothesis 2C 60 4.3.4 Hypothesis 2D 62

4.4 MARKET POSSIBILITIES AND REGULATORY RESTRICTIONS 64

4.4.1 Hypothesis 3A 65

4.4.2 Hypothesis 3B 68

4.4.3 Hypothesis 3C 71

4.4.4 Hypothesis 3D 74

4.5 OVERALL CASH SURPLUS MANAGEMENT PROCESS 76

4.5.1 Hypothesis 4 76

CHAPTER 5 CONCLUSIONS 80

5.1 INTRODUCTION 80

5.2 SUMMARY OF THEORETICAL FINDINGS 80

5.2.4 Market knowledge and regulatory restrictions 82

5.3 SUMMARY OF EMPIRICAL FINDINGS 83

5.3.6 Overview Swedish companies 88

5.4 CONCLUSIONS 89

5.4.2 Identification of excess cash 90

5.4.4 Overall (summarized) conclusion 92

5.4 THEORETICAL IMPLICATIONS 92

5.4.1 INTRODUCTION 92

5.5.2 The identification of excess cash 92

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5.6.2 The identification of surplus cash 95

5.7 LIMITATIONS 96

5.7.2 Contents limitations 97

5.7.3 Methodology limitations 97

5.8 DIRECTIONS FOR FURTHER RESEARCH 99

REFERENCES 101

APPENDICES ERROR! BOOKMARK NOT DEFINED.

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APPENDIX B ERROR!BOOKMARK NOT DEFINED.

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APPENDIX E ERROR!BOOKMARK NOT DEFINED.

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TABLES AND FIGURES

Figures

Figure 1. The cash flow forecasting process (Treasury Today, 2007) Figure 2. Results question 3.

Figure 3. Results on question 11. Figure 4. Results of analysis H1A. Figure 5. Results of question 4. Figure 6. Results of question 10. Figure 7. Results of analysis H1B. Figure 8. Results on question 8. Figure 9. Results of analysis H2A. Figure 10. Results on question 2. Figure 11. Results on question 15.

Figure 12. Categorization maturities in days. Figure 13. Results of analysis H2B.

Figure 14. Categorization maturities in months. Figure 15. Results of analysis H2C.

Figure 16. Results on question 6. Figure 17. Results of analysis H2C. Figure 19. Results on question 7. Figure 20. Results of analysis H2D. Figure 21. Results on question 18. Figure 22. Results on question 17. Figure 23. Results of analysis H3A. Figure 24. Results on question 14 Ι. Figure 25. Results on question 14 ΙΙ. Figure 26. Results of analysis H3B. Figure 27. Results on question 13B. Figure 28. Results on question 13. Figure 29. Results on question 19. Figure 30. Results on analysis H3C. Figure 31. Results of analysis H3D. Figure 32. Results on question 5. Figure 33. Results on question 1. Figure 34. Results on question 5 Ι. Figure 35. Results on question 5 ΙΙ.

Figure 36. Results on combination of questions 21 and 3. Figure 37. The risk pyramid (www.investopedia.com). Figure 38. Results of analysis H1A.

Figure 39. Interpretation values (Pallant J., 2003)

Figure 40. Results of analysis combination of question 1, 10 and 4.

Tables

Table 1. Summary empirical findings Table 2. Company list

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DEFINITIONS AND ABBREVIATIONS

The definitions described are written to make clear how the author interpreted these terms, and how these terms will be used in the rest of this reading.

¾ Cash surplus management process: In this study the cash management process concerning cash surpluses is investigated. This process points on the entire process of the identification, until the investment of cash surpluses. During this study this process will be named the cash surplus management process.

¾ Investable (cash): The word ‘investable’ cannot be found in any dictionary, hence, in this research this term is used to point on money which could be used for investment. This money is (not) identified, and could be invested in all kinds of instruments.

¾ Treasurer: Treasurer is a broad definition. Within the treasury department an overview should be created of all cash flows; within and outside a company. The financial manager managing, monitoring and controlling this entire process is the treasurer. In this research, within the tasks of the treasurer the focus will be on the tasks concerning the cash surplus management process.

¾ Playing field of the treasurer: In its operations, the treasurer has many possibilities and restrictions. These boundary factors create the scope of opportunities and

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CHAPTER 1 INTRODUCTION

1.1 Introduction

Around the globe the role of corporate treasury is changing and treasury management structures are keeping pace with that change. This change is heavily influenced by

globalization. The regulatory and technological changes permitted the scope of the corporate treasury function to extend across geographical boundaries (Callahan, 2002).

Companies are trying to increase their visibility and the speed of the cash flowing through their organizations. To optimize the deployment and investment of the company's capital, treasurers should have an accurate and timely view of the company's cash, debt and

investments (Feig, 2006). Additionally, the treasurers are looking for ways of how to optimize liquidity and for ways on how to process funds more efficiently. Companies keep on coming with new ways on how to control credit risk and how to match management systems

(Horsewood et. al, 1998)

Companies can have significantly different cash flows; are different in relation with their corporate climate; and, many companies have trouble corralling the various internal sources of data needed for reliable forecasts on a standard basis. Therefore, the forecasting process (Ochs, 2006) and the investment policy must be customized to the company and industry; a process that can be time consuming.

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In the year 2007, it appeared that many companies are coping with cash surpluses. But, do these companies have a clear plan on how to invest these cash surpluses in the most optimal way? Maybe companies are simply not aware of the fact that cash surpluses are present; since cash flow planning and forecasting is done inappropriately. Or on the side of investment; since, they don’t have a clear investment policy. In this thesis will be researched what factors influence the playing field of the treasurer in the process of identification and investment of cash surpluses. To investigate these factors the three main sub-processes within this overall cash surplus management process will be examined; the identification processes (forecasting processes); investment policy; and, market knowledge.

1.2 Objective

The treasurers have to take many restrictions into account when investing identified cash surplus. First, the whole process of cash surplus investment is depended on the identification of cash surplus. Only when cash surpluses are identified, these can be invested. Therefore, the accuracy and timely identification of cash flows, and therefore the forecasting process is highly important. Secondly, when invested surplus is identified, the possibilities in how to invest are created by the investment policy. In this policy all internal (stakeholders) and external (law, regulatory and industry) requirements should be taken into account. Thirdly, the market creates possibilities as well as restrictions. Market knowledge is a necessity in order to identify the possibilities available. This knowledge can be gained by market analysis and benchmarking techniques. The extents to which companies perform these practices create additional boundaries for the treasurer. This thesis focuses on the boundaries created by these three factors. Of course, the treasurer has to cope with more boundaries except these. Hence, this study identifies these three processes as the most significant, and therefore the main focus will be on the forecasting process, investment policy and market knowledge.

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1.3 Problem Statement

Within many companies treasurers are aware that cash surpluses are present but they are struggling to find the optimal manner to identify and invest these cash surpluses. First they are struggling with how to identify this cash surplus as soon as possible, and secondly they are coping with many restrictions and requirements in their process to invest this surplus money. In this study, it will be investigated whether relations exist between different factors in the overall cash surplus management process. In order to identify what factors do, and do not, influence the playing field (of decision making) of the treasurer. The main question that will be researched in this study is the following:

What factors influence the playing field of treasurer in the cash surplus management process?

1.4 Contribution

First, this study will contribute to academic research, because of the in-depth focus on cash surpluses. In the article of Galant (2004) the globalization of the treasury is discussed. It proposes the need for increased process and cost efficiencies in today’s competitive global environment. The article provides insights into regional trends, the treasurer’s strategic focus, and innovative best practices treasurers are already using to create value. In the article of Galant (2004) a few different top initiatives are revealed that the treasury should use in order to be competitive and efficient. One of these initiatives is; ‘the optimization of returns on

liquidity in today’s low interest rate environment.’ This optimization is in the article scarcely

discussed. In these thesis will be researched what factors influence the possibilities for the treasurer to optimize returns on cash surpluses.

Secondly, with the highlighting of the boundaries of the playing field of the treasurer, management can gain insights in how restrictions affect the actions of the treasurer. With these insights, management should be encouraged to improve business processes and

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1.5 Thesis outline

The research questions will be answered in the following chapters. In Chapter 2, ‘the literature review’, the three main processes will be grounded by literature and further explained. Additionally, the hypotheses will be drawn which will form the base of the analysis. In Chapter 3, ‘Research design and Methodology’, a light will be shed on the research approach; in what kind of data will be used, and how this will be collected. In

Chapter 4 the empirical results will be presented, explained, analyzed and conclusions will be drawn. In this chapter the hypotheses based on the used theory will be tested with the

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CHAPTER 2 LITERATURE REVIEW

2.1 Introduction

In the article of Galant (2004) the globalization of the treasury is discussed. It proposes the need for increased process and cost efficiencies in today’s competitive global environment. The article provides insights into regional trends, the treasurer’s strategic focus, and

innovative best practices treasurers are already using to create value. In the article a few different top initiatives are revealed, that the treasury should use in order to be competitive and efficient. One of these initiatives is; the optimization of returns on liquidity in today’s low interest rate environment. This liquidity should be optimized by improving the processes of cash flow forecasting, the investment policy and market knowledge, and the gap between them (Pozin, 2006).

The three previously mentioned processes (Pozin, 2006); all fall under the covered process of cash management. In academic research, the term ‘cash management’ encompasses many different processes to effectively manage cash. Cash management can be defined in many different ways, like in the following examples: “channeling available cash into expenditures that enhance productivity, directly or indirectly” (www.acmeadvisor.com); “The strategy by which a company administers and invests its cash” (www.investorwords.com). In this study, a different term is used to make clear on which process within the cash management process the focus is: cash surplus management. This term is used to encompass all the processes

concerning the efficient management of excess cash. Therefore, for this study the following definition is used: cash surplus management encompasses the entire process of the

identification until the investment of cash surpluses. All the processes necessary for this identification and investment, such as market analysis and benchmarks are included in this definition.

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definitions is very broad for a few returning topics in this study, these will be defined to prevent for misinterpretation and to show our focus by leaving unimportant meanings out. Fourthly, an explanation of the main processes within the three chapters will be given, in order to create a deeper in understanding of the entire process. And finally, a conclusion will be drawn from how the processes are expected to affect the entire process surrounding the identification and investment of cash surpluses.

2.2 Identification of cash surplus 2.2.1 Introduction

In this part the process of the identification of cash surpluses will be discussed. This

discussion will encompass; a brief literature review, an explanation of common definitions, an explanation of the involved processes, and a theoretical conclusion of the impact of certain factors on the playing field of the treasurer.

2.2.2 Literature review

Some researchers (Ross, 2003) state, that there exists not such a thing as perfect forecasting. Although the majority (Cole, 2004; Doyle, 2007; Hunstad, 2005; Neville, 2004; Parry, 2006) thinks that forecasting can lead to many benefits such as; profitability, visibility, control, process improvements, transparency and better credibility. Cash flow forecasting is a repeatable process (Navon, 1996). Plans and predictions need to be made about the cash flows, but in the end discrepancies between the forecasted and actual result are almost inescapable (Navon, 1996; Leedom and Kilts, 2005). Nowadays, there is an increasing amount of researchers (Leedom and Kilts, 2005; and Scully, 2005) stating that the treasury function, including forecasting, should be seen as a strategic instead of a back office task. When companies are having a good overview in their cash flows, financial forecast will be more accurate over a longer time horizon (Leedom and Kilts, 2005). This way cash surpluses and shortages can be identified in an early stage and investment solutions can be applied to create a more effective cash flow management approach (Treasury Today, 2007).

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accurate forecasting does not outweigh the benefits. On the other hand, McShane (2004) says in his article, that although it takes commitment to build and use a cash flow system, the benefits exceed the effort. Others (Bedell, 2007; Sagner, 2004) say that treasurers still have the wrong assumption that it is not possible to forecast correctly in their organization, and therefore, choose not to implement an effective forecasting process. Again, others (Leedom and Kilts, 2005) state that when companies can develop financial forecast that are more accurate over a long term can result in, that companies can invest excess capital at longer maturities and earn higher returns (Vallen, 2006).

Much research (e.g. Sagner, 2005; Ochs, 2006; Carpenter and Ellis, 200) is done on what the best way is to organize the forecast process. The ways organizations organize their forecasting process is different everywhere. This difference is due to the fact that forecasting must be tailored to the company (Ochs, 2006). Whether to advocate for decentralized treasury (Sagner, 2005), or to centralize treasury functions is depending on many factors; for example on firm size, scope and corporate climate. Forecasting needs centralization in order to make the forecasting more effective. On the other hand, researchers (Carpenter and Ellis, 2000; Hunstad, 2005; Sagner, 2005) focus on the knowledge behind cash flow forecasting. Treasurers should; have open communication with other departments; and, know the operational factors influencing the cash flows.

When a firm does not have reliable cash forecasting resources, management is unable to accurately predict cash balances. Inaccuracy or the inability to predict cash balances leads to opportunity costs (Ochs, 2006). Knowing a forecast is bad or unreliable often causes

treasurers to make overly vigilant investment decisions or borrow too frequently and be ambushed by one surprise cash need after another (Ochs, 2006). The result is missed revenue opportunity, or increased costs associated with overdraft fees, credit or liquidation penalties (Vallen, 2006). Hence, cash flow forecasting will help decision makers to efficiently allocate funds across the spectrum of available investment instruments. The benefits of allocating capital across various instruments are yield enhancement and risk reduction (Vallen, 2006).

2.2.3 Definitions

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cash flows resulting from its operating, investment and financing activities. Cash flow

forecasts present an early chance to recognize probable cash surpluses or gaps, and generate a dependable foundation from which investment and financing decisions can be made (Treasury today, 2007). A cash surplus is the cash that goes beyond the cash required for day-to-day operations (www.toolkit.com).

2.2.4 Explanation of the involved processes

2.2.4.1 Introduction

The cash flow forecasting process within a company is concerned with the prediction of future cash flows and identification of cash surpluses. The technique of cash flow forecasting may be rather simple in theory: to determine the sum of receipts less the sum of

disbursements over a certain period (Treasury Today, Best Practice Handbook, 2007). Hence, this process needs to include all predicted cash inflows and cash outflows into account, which is not a simple task to accomplish. In this part, in short, the process of cash flow forecasting and the existence of excess cash will be explained, to create a better understanding.

2.2.4.2 The cash flow forecasting process

A typical process for cash flow forecasting can be described by figure 1. As shown in this figure, this process encompasses eight sub-processes that are depended on a variety of data sources. The basic process within the cash flow forecasting process is the collection,

forecasting and consolidation. These processes are supported by the other five sub processes.

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frequency relevant to their type. Information providers must be aware of this need and ensure

updates are communicated to the treasury in good time. In turn, treasurers must be continually aware of movements within the cash flow environment so that decisions are based on the very latest information (Treasury Today, 2007). Supporting treasury management systems (TMS) are used to provide the treasurer with the necessary information (www.gupea.ub.gu.se). The utilization of well-timed and correct cash flow forecasts will permit the treasurer to estimate the quantity, currency and location of cash surpluses as well as the amount and timing of any liabilities are due (Treasury Today, Best Practice Handbook, 2007)

Data sources e.g.

Bank reporting Accounts receivable/ Accounts payable Payroll Invoicing ERP TMS Collect Review Decision Consolidate Forecast Investigate and resolve Reconcile Update

Figure 1. The cash flow forecasting process (Treasury Today, 2007)

2.2.4.3 Identification of excess cash

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2.2.4.4 Barriers in the process of identification of excess cash

In practice it can be complicated to put into practice an effective cash flow forecasting system at the corporate level, as the requisite data is regularly spread across different systems and managed in different divisions of the company (Treasury Today, Best Practice Handbook, 2007). There are many barriers in developing an efficient cash flow forecasting process. Six well known barriers are; the lack of systems integration; overuse of spreadsheets; lack of support; isolation of treasury department; too many task of the treasury department;

technology issues. Each of these six barriers will be outlined, to explain the common pitfalls within the forecasting process.

Lack of system integration

When within a company systems are not integrated, this means that many different systems are used for the same processes. This means that there is not one standardized procedure used across the entire organization. Therefore, many different systems are used, which are in the end very difficult to integrate to create one overview of the entire system. In forecasting this means that all the data sources that are responsible for the input in the process, use different manners to collect, document and process the data. This creates difficulties in a next step of the forecasting process, the consolidation process. Here, only the deciphering of the different manners is really time consuming and a big cause for extra errors. When systems are

integrated this will lead to a minimal time and effort required for data consolidation, manipulation and analysis. This in turn will lead to improved data timeliness and accuracy (Treasury Today, 2007).

Overuse of spreadsheets

Managing an overabundance of spreadsheets requiring manual input on a daily or intraday basis is not conductive to reliable forecasting. Since, manual input is highly sensitive for errors. The reliability of forecasts is on stake when the input, the spreadsheets, cannot be easily accessed and or not error-free (Treasury Today, 2007). Although, the usage of

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Lack of support

Cash flow forecasting requires cooperation from many different parts in the company. Financial and operational information is necessary to see the trends cash inflows and outflows. Therefore, different divisions and levels in the company are part in the entire process of forecasting. And these need to be willing to participate in this process. At local level, managers dislike the change and upheaval caused by new systems and procedures. Backing from executive management and board is also essential when implementing or improving any new process involving company wide participation. Therefore, diplomacy, open communication lines and information sharing will help to increase support in the organization (Treasury Today, 2007).

Isolation of the treasury department

When treasury staff is isolated, communication with other departments becomes difficult. As a result, valuable trend-spotting data is possibly not communicated to other parts of the company (Sagner, 2005). When the treasury department is de-isolated, more valuable information will be included in the forecasting process, this way achieving better cash forecasts.

Too many tasks treasury department

Cash management is faced with multiple processes and decisions. Already, when only looking at all the different sub-processes of the cash flow forecasting process, it is visible that the monitoring and management of these is a time consuming and a hard task. And then it should be remembered that this is only one of the variety of processes a treasurer deals with.

Therefore, it is a common phenomenon that treasurers simply have too many tasks that need to be dealt with. As a result, treasurers can lose track at certain processes, which will have a negative outcome on the entire process.

Technology issues

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2.2.5 Conclusion

In short, cash flow forecasting will help decision makers efficiently allocate funds across the spectrum of available investment instruments. Any postponement or incorrectness of the cash forecasts could lead to a risk of illiquidity, increased funding costs through needless

overdrafts or credit lines and a decreased yield on excess cash (Treasury Today, Best Practice Handbook, 2007). The accuracy will further stipulate whether the forecast can or cannot be used in order to make decisions concerning investments. Hence, inaccurate forecasts can result in opportunity costs and therefore missed revenues (Vallen, 2006).

When recognizing how the identification process shapes the playing field of the treasurer, the first thing that becomes clear is that the earlier cash surpluses are identified, the earlier these can be invested. Therefore, standardized procedures and system integration are very

important, in order to fasten the process of identification. Next, after cash surpluses are identified other flaw comes up, the trustworthiness of the forecasts. Are the forecasted cash surpluses really forecasted well? Or did one of the barriers cause difficulties? This could lead to the fact that the forecasts are not at all trustworthy and therefore not useable for investment. Within the process of identification the boundaries are mostly created by the timing of the forecast and the reliability of the forecasts. To make sure that these factors are both stable the barriers needs to be overcome, in order to create a robust cash flow forecasting process.

2.3 Investment possibilities 2.3.1 Introduction

In this paragraph the investment possibilities will be discussed. Therefore, literature concerning the investment policy, policies concerning excess cash and the investment portfolio will be briefly discussed. This discussion will encompass; a brief literature review, an explanation of common definitions, an explanation of the involved processes, and a theoretical conclusion of the impact of certain factors on the playing field of the treasurer.

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strategy (Saperstein, 2006). Hence, an investment policy should be based upon; an objective analysis of business and cash flow cycles; specific industry regulations; risk tolerance and targeted returns (Leedom and Kilts, 2005). Saperstein, (2004, and 2006) states that after reviewing the investment objectives, a properly drafted investment policies should be formed that comprises the following four main sections: authorized securities; concentration limits; maturity structures and credit ratings. Additionally, companies should benchmark their investments and modify them where needed (Leedom and Kilts, 2005).

The firm’s investment policy determines the risk and return profile for investment decisions. The risk profile filters investment instruments that are unacceptable to the firm’s policy, while the return measure sets the benchmark for management in terms of required return on

investments. An outdated investment policy results in inadequate investment performance. Failure to regularly adjust the risk profile leads to either overly risky investments, or investment decisions that under perform due to an overly sensitive investment instrument filtering process (Vallen, 2006).

In recent research (Pozin, 2006) the high liquidity of companies today is discussed. According to this research there exists a gap between; investment policy management; benchmarking portfolio performance and the forecasting of future cash needs. The closing of this gap,

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Hence, Almeida, Campbello, and Weisbach (2004), Dasgupta and Sengupta, (2007), and Khurana, Xiumin, and Pereira (2006), believe that investment may decline today as firms’ liquid balances increase. Since, if firms have more liquid balances and these liquid can be carried into future periods, then firms are less likely to be financially constrained in the future as well. Thus, the higher liquidity lowers the risk that the firm is not able to take projects in the future, should it pass up on projects today. As a result, the firm can become more conservative in its choice of projects today if its liquidity position improves, and the

probability of investment can decline in the level of its liquid balances. Especially, financial constrained firms will derive an optimal cash policy that trades off current investments against potentially profitable future investments (Khurana et. al., 2006).

Through investment management, investors manage their assortment of securities and assets (i.e. investment portfolio) to meet specific investment objectives (i.e. investment policy) (www.wikipedia.org). Within this study the investment policy and the investment portfolio are broadly discussed.

An investment policy serves as the foundation for companies in order to manage their

investments. In this research the investment policy is interpreted as a policy that meets all the restrictions and requirements demanded by the management, industry and regulatory

restrictions. Based on a thorough investigation of the long-term and short-term funding needs, the company’s risk tolerance, the likely return from the investments that fit those parameters and any unusual investment concerns confronting the company, the investment policy sets the ground rules for the investment portfolio. A firm investment policy is the solution for

maximizing the yield that effective investments can deliver for a company while minimizing the possible risks (www.uwmb.org)

Portfolio management is concerned with the decisions of what investment instruments to include in the portfolio, according to the objectives of the company and a dynamic economic environment (www.wikipedia.org). Any portfolio should be composed of a mix of

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2.3.4 Explanation of the involved processes

2.3.4.1 Introduction

In the process concerning investment possibilities concerning excess cash; four important stages need to be followed in order to come up with an investment portfolio that is consistent with the companies’ requirements. These stages will be discussed in the next four parts; investment decisions concerning cash surpluses; shaping the investment policy; the inclusion of a policy concerning excess cash; shaping the investment portfolio.

2.3.4.2 The investment decisions concerning the investment of cash surpluses

Provided with reliable cash flow forecasts, the treasurer is in the position to make the most suitable decisions regarding the usage of surplus funds. When the aim is to maximise investment returns then possibilities for investing funds will need to be acknowledged.

Investing of 100% of accessible funds may be tricky due to the early cut-off times for making many same-day investments. Within the cash management contracts with banks the

possibility to sweep surplus balances into interest bearing accounts should be included. The management of cash surpluses gives the treasurers an often conflicting set of objectives. On the one hand, it seems that any surplus cash should be invested to gain the finest possible returns. On the other hand, simultaneously access to the cash, should it be required, must be preserved and any unwarranted risks should be avoided. Any investment decision will be guided by the investment policy. How much emphasis should be placed on each factors (security, yield, liquidity etc.) will depend on the company’s risk appetite, as decided on by the management and defined in investment policies (Treasury Today, Best Practice

Handbook; 2007).

2.3.4.3 Shaping the investment policy

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outside to the company. In general, these are the four basic guidelines for the shaping of an investment policy. The risk tolerance of a firm will exclude investment instruments that are intolerable to the company's policy while the return measure sets the benchmark for

management in terms of required return on investments (Vallen, 2006). Additionally, within the policy rules should be included; that provide guidelines for the treasurer; that define specific investment requirements; and responsibilities should be assigned to different person within the company (www.uwmb.org).

The investment policy needs to be documented and regularly updated. The documentation is necessary to standardize the process of investments and the creation of an integrated routine across the organization (Leedom and Kilts, 2005; Pozin, 2006). Additionally, to keep up with the pace of the market (interest rates, rate of return etc) this policy needs renewal to make sure that the policy does not becomes outdated (Vallen, 2006). Outdated investment policies can lead to inaccurate investments.

In the last couple of years, (in Sweden) there have been experiences of high investment losses and financial crisis (Englund, 1999; Rogoff, 2008; Jennergren, 2001). After investigation, company boards found out that the controls on investment management were too relaxed. Could it be that therefore, as a reaction upon the experiences company boards decided to formulate stringent policy with more strict limits than before? And that as a consequence within these policies the decision are focused on the fewer allowance of investment instrument? And, does it seem that, nowadays, companies are quite cautious and that as a result, companies prevent for speculation and keep their surpluses on their bank deposits? In the conclusional part of this study, some insights within the Swedish compagnies will be given based upon the emperical findings.

2.3.4.4 The inclusion of a policy concerning cash surpluses

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To guide the investment management teams (treasurers) in their decisions, within the policy, guidelines should be included concerning the investment of cash surpluses. Although, idle cash balances can usually provide earnings credit, the prospect to gain a competitive rate of return must be included into the firm’s overall investment strategy (Vallen, 2006). There are multiple possibilities for the investment of cash surplus (www.toolkit.com). Here again, the investment objectives, time horizon, risk tolerance and required rate of return; must be consulted to make the adequate decisions.

2.3.4.5 Shaping the investment portfolio

Logically, the investment portfolio is shaped according to the investment policy. The rules within the investment policy result in strict requirements for the portfolio, especially in relation with the following four sections: authorized securities; concentration limits; maturity structures and credit ratings (Saperstein, 2004). These four sections exclude investment instruments from the investment portfolio. The mix of investments differs in instruments and maturities. The mix of investments instruments could be comprised of a variety of

instruments; stocks, bonds, mutual funds, and other investment vehicles. The investment portfolio maturities could be mixed from investments with a maturity of one day until maturities of more than one year. Hence, a portfolio should also be balanced. The portfolio should contain investments with varying levels of risk to help minimize exposure. Hence, spreading your investment over several asset classes should help reduce your risk of losing your entire investment (www.360financialliteracy.org).

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operational liquidity can be invested in overnight-investment instruments with late investment cutoff and early morning redemption. Longer-term liquidity can be placed in instruments that offer higher yield in return for extended maturity. Cash managers that neglect the opportunity to earn return on excess cash, risk having an inadequate investment strategy, and also risk high opportunity costs associated with the firm’s liquidity.

When taking these findings into account when looking at the playing field of the treasurer, a couple of boundary factors are apparent. First of all, it is assumed in theory that the up-to-date-ness of an investment policy, can affect the results on investments. Also, there seems to be a discussion about how investments are filtered out from the investment portfolio, and about what these factors are. For example priorities and requirements for risk seem to influence the choices for investment instruments. All priorities and requirements stemming from the investment portfolio seem to affect the playing field of the treasurer. Furthermore, early identification of cash surpluses seem to broaden the field of the treasurer, since, more and especially longer maturities can be chosen, which can result in a more efficient way of investment management for the treasurer.

2.4 Market possibilities and regulatory restrictions 2.4.1 Introduction

In this paragraph the market possibilities and regulatory restrictions will be discussed. Therefore, techniques to gain market knowledge, and implications and opportunities concerning compliance will be discussed. This discussion will encompass; a brief literature review, an explanation of common definitions, an explanation of the involved processes, and a theoretical conclusion of the impact of certain factors on the playing field of the treasurer.

Leedom and Kilts (2005) address the need for benchmarking. They state that, after the

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deviates from a benchmark and to adopt investment strategies that explicitly take relative performance, or benchmarking, into account (Basak, Shapiro and Tepla, 2006).

Inadequate short-term portfolio management leads to increased opportunity costs. To avoid this, management should consider various investment instruments and maturities in the liquidity process. For this consideration market knowledge is necessary (Vallen, 2006). As investment vehicles must meet the risk/return profile of the investment policy, the treasurer is left with only a subset of investment instruments (Vallen, 2006).

In a short article of Kapner (2001), the influence of management decisions concerning cash surplus and their impact on shareholders view are roughly discussed. In this article is indicated that decisions taken about cash that also could be returned to shareholders causes many difficulties. The way management handles all internal and external (legal, regulatory and industry) requirements has an effect on the possibilities there are for treasurers to manage their cash management process. The boundaries created through management decisions also decrease the overall playing field of the treasurer in order to invest cash surplus.

Through market research, treasurers can gain more understanding, gather more information and data about competition and investment opportunities in the market. By analyzing the markets market trends can be identified. These way treasurers can recognize which

investment instruments have the right amount of risk and gain the rate of return required by the investment policy. Market analysis is a significant activity in a company’s planning processes (www.wikipedia.org), and therefore investment management. Another way of gaining insights within the markets is through benchmarking. Benchmarking is a management process used to assess specific aspects of company processes in comparison with best

practices. This can be done by judging against (benchmarking) other companies within the same industry. Benchmarking permits companies to develop plans on how to embrace such a best practice, typically with the goal of improving performance (www.wikipedia.org).

Companies cannot just simply invest in the most risky investment instruments with the biggest amounts of money. Companies are restricted in many ways. The first kind of

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investment policy (paragraph 2.3). Subsequently, legal and rulemaking regulations need to be taken into account. Widespread examples of regulation comprise efforts to control market entries, prices, wages, employment rules, standards for certain goods and services

(www.wikipedia.org). Financial institutions are subject to financial regulations. Financial regulations include specific requirements, restrictions and guidelines, to assure maintenance of the integrity of the financial system (www.wikipedia.org). Additionally, in relation with public services, most governments have a structure of control to regulate the conflict between commercial procedures and the interests of the consumers of these services. Companies need to manage their business in line with the guidelines created by law and industry regulations, this way preventing for sanctions in the form of law cases or money fines.

2.4.4 Explanation of involved processes

Market analysis

In order to select suitable investment methods and vehicles, the treasurer must have the

knowledge about how each asset class performs under diverse market conditions. Stocks often stand out when corporate earnings are solid and financial markets are growing, yet this

environment often has the contrary effect on bonds. In the meantime, bond returns often increase during periods when stock values fall. Portfolios that are appropriately diversified among various asset classes may be able to compensate down-market performers with investments that in general move in the opposite way (Bank Investment Consultant, 2005).

Not only should the treasurer be aware of the trends within the market. The treasurer should also have knowledge about what kind of investment instruments there are available and adequate for its investment policy. When deciding on how to invest surplus funds, a treasurer can select from a variety of investment alternatives in the financial markets (Treasury Today, Best Practice Handbook, 2007). The most common investment instruments are; bank

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Management restrictions

The restrictions that come forth out of management decisions mostly come forth out of the investment policy. Hence, there are some managerial restrictions that are not mentioned before, but are nevertheless important in investment decisions. Many companies have ethical objectives that result in extra restrictions. It could be that investments are only permitted in one particular region, only in specific assets or only in underdeveloped countries, in line with the corporate governance of the company.

Financial and legal regulations

The main focus in this research is on the Swedish financial market. The purpose and image of the financial system need to be preserved and therefore the laws are created which regulate the institutions that represent the financial system. Finansinspektionen (the Swedish Financial Supervisory Authority) and The Riksbank (the Swedish central bank) have the main

responsibility to oversee that these laws and regulations are obeyed, and to maintain financial stability. Therefore, companies within the financial system in Sweden need to follow the guidelines of the Finansinspektionen (FI). The FI issues specific regulations for financial activity. Additionally, FI issues general guidelines which different than laws are optional, hence must be followed by financial institutions to be respected in carrying on sound activities. FI gives out permits and licenses for different actions on the financial markets (www.bankforeningen.se).

In sum, the findings from theory will be discussed. Companies should benchmark their investments against popular indexes in the broader market and adjust their investment as needed. Benchmarking is described as a practice that companies should not forget in order to shape an efficient investment portfolio. Companies can also choose for the option to conduct market analysis in order to come up with strategic moves. Overall, investigation of the market by looking at indexes, other companies and discovering of instruments broadens the scope of opportunities. By maintaining traditional ways for investment, fruitful investment

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restrictions that put boundaries on the possibilities of the investment process. As such, legal-, financial and management restrictions seem to be the most common ones.

As a result, again new factors that influence the playing field of the treasurer came forth out of this part of the literature review. In short, it seems that when treasurers are free to be creative without having to keep many different restrictions into account, more different investment opportunities could be used in order to create a more advantageous outcome. Many restrictions lead to a smaller scope of investment opportunities. Hence, more time will be needed to decide on investing or not. The restrictions from management result from requirements and priorities on many factors (like risk, yield and liquidity). Also, the presence of knowledge about the market seems to influence the playing field. By using benchmark techniques and conducting market analysis this knowledge can be gained, to discover more (efficient) opportunities.

2.5 Summary literature review

When looking at how to identify cash surplus and the investment possibilities, many factors play a roll. Throughout the literature review already a few obvious boundaries and

opportunities are shown. For example, the way the forecasting process is structured, or not even present at all, creates the next boundaries and restrictions for the treasurer on how decisions can be taken. On the one hand, when cash flow forecasting is not done effectively and regularly, companies can lose substantial amounts of cash, as well as opportunity costs (Ochs, 2006). On the other hand, accurate forecast can create greater visibility and control across the organization (Treasury Today, 2007). Additionally, concerning the ways to invest excess liquidity, the way a company manages its investment policy depends upon; the

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2.6 Hypotheses building 2.5.1 Introduction

The focus of this study is on excess cash investments. Therefore, the identification and management of cash shortages are not discussed. Secondly, in this study is assumed that companies do want to invest in case of excess cash. Therefore, the relating theory, concerning the conservative investment approach of companies with excess liquidity, is not taken into account. In Appendix C (table boundaries) the literature is summarized which is tested in this research. (The references related to the boundaries found in the table can be found in this literature review.)

In the table the factors evaluated in this research are shown. For each of these factors the possible implications and opportunities, found in theory, are given for the whole process of identification and investing of excess cash. As a result of these, implications and

opportunities, boundaries are assumed for the treasurer to narrow or extend this playing field. Through the assumed boundaries the hypotheses for this thesis are formed. These hypotheses will be tested in this study.

The hypotheses come forth out of the theory and are assumed to be the ideal way to manage the whole process of identification until investment of surplus cash. With this study we want to investigate whether companies experience the boundaries in the same way as they are discussed in theory. The hypotheses are discussed according to the factors discussed in the table of boundaries and literature review.

2.5.2 Identification of cash surplus.

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H1A. Whether (or not) companies perceive the forecasting process as a strategic task will affect on the annual return on the spectrum of investment instruments.

Hypothesis 1B will test the effect of accuracy of cash flow forecasts. In theory is mentioned that when a firm does not have reliable cash forecasting resources, management is unable to accurately predict cash balances, therefore cash surpluses. Inaccuracy or the inability to predict cash balances leads to opportunity cost (Vallen, 2006). Since, management is not able to leverage forecasting data to separate cash into different maturity pools and invest in

extended maturity instruments that offer higher yields. The result is a missed revenue opportunity. Summarized, this means that; the reliability will stipulate whether the forecast can or cannot be used in order to make decisions concerning investments (Leedom and Kilts, 2005; Vallen, 2006).

H1B. The way companies perceive the trustworthiness of their cash flow forecasting process will have a relationship with the percentage of the forecasted investable cash that will be used for investment.

2.5.3 Investment possibilities

Secondly, the boundaries forthcoming out of the investment possibilities will be tested. In theory, the lack of a documented investment policy most of the time leads to missing opportunities (Leedom and Kilts, 2005; Pozin, 2006; and Scully, 2005). Hence, when

documented investment policies are there but not updated frequently, this can result in overly risky or underperforming investments (Vallen, 2006). The ideal investment policy to be efficient should therefore be documented and updated to reduce overall risk. This can be done in different ways, for example, through diversification, while increasing revenue through enhanced return (Vallen, 2006).

H2A. The up-to-date-ness of the investment policy will have a relationship with the annual percentage of return on investments.

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already causes restrictions on the opportunities for investments, because the earlier cash surpluses are identified, the faster these can be invested, in investment instruments with longer maturities. Additionally, investing in investment instruments with longer maturities will result in higher return on these investments (Vallen, 2006).

H2B. Early identification of the presence of excess cash affects the opportunity to invest in longer maturity investments.

Treasurers that neglect the opportunity to earn return on excess cash risk having an inadequate investment strategy (Vallen, 2006). An investment strategy should include a policy that guides investment of excess cash. Even though, cash surpluses can offer earnings credit, the possibility to earn a competitive rate of return must be factored into the firm’s overall investment strategy.

H2C. The presence of guidance of excess cash funds established within the investment policy affects the opportunity to earn a higher rate of return.

In the end of one of the previous parts (part 2.3.4.3) there is an explanation for the cautious behavior of companies. It is stated that is seems that, nowadays, companies are quite cautious. And as a result, companies prevent for speculation and keep their surpluses on their bank deposits. Hence, in theory it is discussed that when treasurers neglect the opportunity to earn return on excess cash, they risk having an inadequate investment strategy (Vallen, 2006). This shows a quite contrasting pressure on the possibilities of the treasurer. The restrictions are there for cautious treasurers, and the extra guidance for excess cash should create an opportunity. Therefore, a negative relationship is expected between these two variables.

H2D. The presence of guidance of excess cash funds established within the investment policy is negatively related to the risk requirements concerning the investments.

2.5.4 Market possibilities and regulatory restrictions

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treasurer must understand the market and be aware of the different opportunities within the market. Remaining updated of the opportunities in the market can be done in different ways, most commonly this is done through; benchmarking (Basak, Shapiro and Tepla, 2006; Leedom and Kilts, 2005) other companies and popular indexes. By benchmarking their investments their investments against popular indexes (Leedom and Kilts, 2005) and other companies in the broader market, companies can adjust their investment as needed.

H3A. The usage of benchmark techniques within companies is related with the willingness to take new investment opportunities into consideration.

Not only benchmarking is used to search for fruitful ways for investment. By regularly

conducting market analysis, companies are able to manage their investment portfolio actively. This will result in more knowledge about different options. Therefore, the expectation in this research, based on the theoretical findings, is that frequent conduction of market analysis will result in a broader set of investment opportunities.

H3B. The frequent conduction of market analysis affects the breadth of the set of investment instruments.

The previous hypotheses all are forthcoming out of business processes. Hence, there are also other regulations which narrow the opportunities of the treasurer to a smaller set, which decrease the movement of the treasurer. In this study the focus is mostly on the restrictions forthcoming out of internal company decisions, therefore, management restrictions are the focal point. Expected from theory, it will be more apparent in companies with a high priority on risk that board approval is required for certain transactions.

H3C. The way companies prioritize risk affects the need for management and board approval, for all investment transactions exceeding a certain risk level.

When companies are managed in a very bureaucratic manner and management approval is necessary for every investment, this will result in time consuming processes before the actual investment takes place. This will decrease the time that the money could have been

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H3D. The necessity of board and management approval for significant investment transactions affects the maturity structure of an investment portfolio.

2.5.5 Overall cash surplus management process

The cash flow forecasting process, the investment policy, market knowledge and compliance with management, laws and regulations, all affect the efficiency of the management of excess cash (Pozin, (2006). The processes can function independently from each other, but in the end should function as a dependent whole. Hence, many companies are coping with a gap

between these processes or at least errors within one of the processes (Pozin, 2006). To be able to improve the process of managing excess cash, it is important to identify where the most implications exist.

Since, the cash flow forecasting process functions as the base of the identification and investment of surplus cash, this process needs the fullest attention. Hence, since within this process many different departments are involved, processes still not always are standardized and support from the entire organization is missing it seems that this process needs continuous monitoring and improvement this part of the process is seen as the part with the most

problems.

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CHAPTER 3 RESEARCH DESIGN AND METHODOLOGY

3.1 Introduction

This research started with gaining as much knowledge as possible on all the different processes, to shape clear objectives, a feasible research proposal and unambiguous

questionnaires. After, the collection of (theoretical and practical) knowledge the hypotheses could be established and questions for the questionnaire could be formed (Appendix B). Simultaneously, an appropriate target group was created for the research to be directed at (Appendix A). Next, the distributing and collection of the completed questionnaires took place. Followed by the analysis, of which clear conclusions could be drawn.

3.2 Knowledge collection 3.2.1 Introduction

In order to understand the different aspects of all processes investigated in this research, knowledge is necessary to give a clear understanding. This knowledge can be explored in different directions. In this study to come up with this knowledge, both the theoretical and practical sources were taken in consideration.

3.2.2 Literature research

The search for knowledge in the theoretical direction was focused on search in articles of respected journals and scientific articles. In this literature different perspectives on how to manage the diverse set of practices were discussed. Actually, the information discovered created a very wide set of theories; similar, substituting, hence also definitely contrasting with each other.

3.2.3 Practical expert knowledge

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consultancy firm chain could be used, and that there were three consultants (one supervisor and two sub-supervisor) within the firm who assisted by giving feedback on the research that was performed. These three consultants are experts in the field of Cash Management; and all interested in more knowledge about the process surrounding cash surpluses. In the eyes of these consultants, especially, new knowledge in the investment portfolio was high on their priority list. This resulted in a shifting focus from the cash forecasting process, to a focus more on the investment portfolio. Especially, knowledge about the mixes in maturities and investments were demanded. As a result, within this research connections were sought between factors within the entire process and their influence on mixes in portfolio.

To narrow down the focus, practical knowledge from the experts on this area needed to be consulted, to shape all theories down in one direction, and create a clear overall objective; the answering of the newly shaped research question. The consultants gave the author more insights in the practical ways of coping with the processes researched. Through them it was possible to make a choice between the theories found. Consequently, with both theoretical and practical knowledge the hypotheses were shaped in order to answer the research question.

3.3 Questionnaire formatting 3.3.1 Introduction

In carrying out a survey it is important to structure, focus, phrase and ask sets of questions in a mode that is comprehensible to respondents. Such questions also need to minimize bias, and make data available that can be statistically analysed. Therefore, four matters needed to be reflected upon: questionnaire focus, question phraseology, the form of response, and questions sequencing and overall presentation (Gill & Johnson, 2005).

3.3.2 Questionnaire focus

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make sure that no irrelevant questions were included, continuous examination of possible answers was done.

This examination was done by four different groups of people; first, the three consultants engaged in this research were asked to give feedback to make sure that the questions really focused on the main purpose; secondly, academic experts were asked to give feedback in order to shape the survey; thirdly, the marketing department of the consultancy firm, with lots of experience in performing surveys, checked the survey upon: question bias, relevance and presentation; and fourthly, a group of arbitrary persons checked the survey, in order to be sure that this questionnaire could be completed by everyone.

However, since this research was done in cooperation with a consulting firm there were a few requirements that needed to be considered. First of all, the maximum amount of questions was set on twenty. This amount was chosen, because of the small amount of spare time the target group of this research has. Therefore, to make sure that the target group would answer, the questionnaire needed to be as short as possible. Secondly, since the focus shifted to the

investment portfolio as a result of business interests, a few questions needed to be replaced by others. In the end, the questionnaire was composed of a (insignificant) smaller amount of questions that could be asked relevant to the research, than before. This made it more plausible that respondents would complete the questionnaire.

3.3.3 Questionnaire phraseology

The term phraseology is used to explain whether or not the manners in which the questions are asked are comprehensible to respondents. To come up with intelligible questions, a few points should be taken in consideration (Gill & Johnson, 2005).

1. ‘The purpose of the research should be revealed to respondents in a way that will promote the likelihood of their co-operation without biasing subsequent responses’ (Gill &

Johnson, 2005).

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in benchmarking and improving these best practices. Hence, the questionnaire prevented for bias, since, the manner of analysing could not be known, and therefore, the results of the analysis would not be influenced through bias.

2. ‘The instructions should be clear and unambiguous’ (Gill & Johnson, 2005).

The questions were asked on either a four or on a six point scale. Hence, there were two questions that needed to be answered in a different (more complex) manner. For each of the answer possibilities, the meaning was obvious and clear. And since, most questions were asked in the same way, it was easy to complete the questionnaire. The way the questionnaire answer opportunities were shaped, also, had to be in line with the consulting companies’ requirements. Therefore, the resulting question and answer possibilities needed to be reconsidered, which resulted in the final clear questionnaire.

3. ‘The questions are understandable; they are free from jargon, obscure terminology,

unsuitable assumptions and ambiguity’ (Gill & Johnson, 2005).

Since, the target group (the treasurers) are expected to be familiar with most definitions, not all jargon needs to be deleted. Further on, questions asked were made as short and general as possible, in order to prevent for obscure terminology, unsuitable assumptions and ambiguity.

Concerning both point two and three to test the phraseology, for this research many different persons from different ages, different professions and with different expertise were asked to review the questionnaire. Their comments and insights leaded to reshaping in order to make sure that the questionnaire is understandable and easy to complete. The guiding line for these persons was to make sure that the questionnaire should be easy to complete, even for a twelve year old person. For these persons the objective was purely based on understanding.

Relevance, focus and expert knowledge was not comprised within their focus.

4. ‘The respondents should be likely to posses the requisite information and knowledge to

answer the questions’ (Gill & Johnson, 2005).

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the consultancy firm that had have contact within the target companies, in order to receive the right name to contact. These persons were then contacted for participation in this research, since it was expected that they would posses the requisite information and knowledge to answer the questions. In the end the right person within the company could always be traced down.

5. ‘The respondents should not find the wording of questions offensive, insensitive or embarrassing’ (Gill & Johnson, 2005).

The questions asked for concrete company information. The questions were all focused on business processes and their performance, instead of on personal or company performance. This creates openness, since the questions do not create a judgemental feeling, but more a search for understanding. Since, not all companies want to disclose all of their business practices; the possibility was given to them to stay anonymous. This way, preventing that respondents refuse giving (honest) answers, to the questions asked.

6. ‘The wording of the questions should not lead to bias through ‘leading’ the respondent to

particular answer or imposing assumptions that may be unwarranted’ (Gill & Johnson,

2005).

The questions asked were mostly focused on how the present business situation is (not). It might have been visible from the questions what the perfect answer would be. Hence, since the companies knew, this perfect answer is very hard to achieve, answering the questions with another answer than the perfect one was more expected.

3.3.4 Form of response

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By structure measurement scales into a questionnaire, a researcher inevitably confines subjects’ responses to a fixed set of replies, which have encoded the necessary measures and thus are readily compared and computed. These closed questions allow comparison and statistical manipulation. In many ways closed questions prevent a lot of data being collected – something which is both a strength and a weakness depending on the objectives of the

researcher. Open ended questions do not impose such limitations, and leave respondents free to answer in their own terms. Data might thus be extracted with greater depth and meaning, revealing insight into relevant issues. Hence, while open questions provide richer data, analysis becomes much more difficult. In this research the focus was on closed questions. Therefore, ordinal scales and interval scales were used. Hence, additionally one open question was included in the questionnaire.

Ordinal scales.

An ordinal scale contains categories that permit differentiation of variables in terms of those categories (Gill & Johnson, 2005). Different points on the scale indicate greater or lesser amounts of the phenomena being measured relative to other points on the scale. But it does not imply anything other than establishing an order, since an ordinal scale says nothing about the distances between points on the scale.

Interval scales.

Interval scales have the same features as ordinal scales the only difference is that the distances between the different points on the scale correspond to equal quantities of the measure

variable (Gill & Johnson, 2005).

3.3.5 Question sequencing and overall presentation

With regard to question sequencing it is helpful to both respondents and interviewers if the designer structures questions in a natural and logical order. The quality of the overall

presentation of the questionnaire, its conciseness and the attractiveness of the design are also of importance in ensuring a high completions rate, as is a suitable covering letter and an easy way for its return.