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Surviving in an environment of financial indiscipline: a case study from a transition country
Author(s) -
PejicBach Mirjana
Publication year - 2003
Publication title -
system dynamics review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.491
H-Index - 57
eISSN - 1099-1727
pISSN - 0883-7066
DOI - 10.1002/sdr.253
Subject(s) - accounts receivable , bankruptcy , market liquidity , payment , profit (economics) , finance , business , economics , microeconomics
Financial indiscipline combined with restricted access to financial markets is a big problem for small businesses in transition countries. In such an environment, small businesses find it hard to collect accounts receivable from their customers, which causes liquidity crises and, in the worst case, bankruptcy. This article describes the development of a system dynamics model to explain the financial indiscipline problem in small businesses. Various policy options are evaluated using this model: (1) retaining profit; (2) borrowing money from the bank; (3) tightening the accounts receivable policy; and (4) delaying payment to suppliers. Tightening the accounts receivable policy in combination with delaying payment to suppliers is found to be the most successful option. However, in most of the transition countries, the legal system is inefficient and such measures would lead to an illiquid economy with a weak small‐business sector. Copyright © 2003 John Wiley & Sons, Ltd.