5 maxims for everyday business & 3 tips for the crisis

Liquidity management is one of the most important disciplines of corporate management. After all, what use are rapid sales if there is still not enough available credit in the business accounts to be able to pay off all current liabilities on time and without any problems? Entrepreneurs who are successful in liquidity management therefore adhere to a few important basic rules. Those who want to become self-employed should also be familiar with this in order to be well prepared to get off to a flying start. In this article you will find out what they are.

What does liquidity management mean?

In order to approach the topic of liquidity management appropriately, it is useful to know what it is actually about. Liquidity management, sometimes also called cash management, is a term from business administration. It designates all entrepreneurial activities aimed at ensuring one’s own solvency. Liquidity management includes liquidity analysis and liquidity planning. A comprehensive definition of terms can be found here (external link).

In multinational corporations and large stock corporations, liquidity management is often organized as an independent subsidiary that has no other task than to map and monitor all payment flows and to guarantee the most economical possible trading with regard to parameters such as interest income, discounts, currency differences and account movements.

In small and medium-sized companies, on the other hand, it is usually the responsibility of the management and the senior commercial employees to steer the liquidity management in an orderly manner.

Important: Do not only make liquidity management an issue in times of crisis!

But a lot of people have a hard time with that. The reason: unfortunately, liquidity management in SMEs often only becomes an issue when the company has got into difficulties. If, for example, bills can no longer be paid or it is even difficult to service fixed costs such as rent and salaries. But that’s actually too late. It is much better if you deal with this important topic beforehand and stick to the following five maxims in the interest of your liquidity:

1) Always be in the picture!
A daily checkout is not rocket science. It is also no longer difficult to create an Excel spreadsheet that shows all fulfilled and open liabilities and outstanding amounts in real time. The backbone of successful liquidity management is always precise knowledge of the company’s own cash flows and the very specific financial situation. This is the only way to identify a liquidity bottleneck in advance and take appropriate countermeasures.

2) Run your own accounting and dunning system strictly!
Invoices with clear payment terms that are sent immediately after the service or delivery are important for your liquidity management. However, since experience has shown that not all market participants show impeccable payment behavior, a tightly managed dunning process (external link) is just as important. Tell your accounting department not to take a joke. A payment reminder with a new deadline should be sent on the first day that the due date is exceeded, and the first and second reminder should also be sent immediately in the event of further non-payment. If both reminders are unsuccessful, it is no longer worth threatening to obtain a court order. It is then better to obtain this immediately.

3) Consistently use payment benefits such as discounts!
Orderly liquidity management means that you are always largely liquid and do not have to put payments on the back burner. You should use this liquidity to consistently realize advantages such as discounts granted for timely payment. Because that pays off for you in the long run.

4) Avoid unnecessary stocks and production surpluses!
In order not to endanger the liquidity of your company, you should pay attention to a precise correlation between production or warehousing on the one hand and sales on the other. A full warehouse is great when order after order comes in. However, it can prove to be a handicap on dry spells because the proceeds do not meet the liabilities that have already fallen due.

5) Plan credit funds in a needs-based and forward-looking manner!
If you are always precisely informed about your company’s cash flows, you can use this data as part of your liquidity planning to look a little further into the future and identify financing gaps before they arise. This, in turn, helps you to raise the funds you need to secure liquidity in good time. For example, by extending your overdraft facility or by taking out a short-term loan. Incidentally, liquidity planning is part of every proper business plan and should be carried out to some extent before starting a business.

Companies already in trouble: tips to avoid liquidity bottlenecks

Things are a bit different, however, as mentioned in the introduction, if the company’s liquidity is already at risk because a crisis is hitting the economy or because no one in the company has thought about liquidity management in good time and perhaps has not drawn up a liquidity plan or financial plan . Then it is of little use to deal with what could have been done. Nevertheless, even in this situation there are a number of ways to get your own liquidity back under control. We would now like to present three of them to you:

  1. advisory: Especially when things are going haywire in business, it is advisable to consult a management consultant. The costs for this consultation can be covered (up to 90%) by the BAFA (BAFA funding for management consultancies).
  2. Negotiate: Realize that a crisis such as the current Corona crisis is not just your crisis. So negotiate with suppliers about installment payments, with your landlord about deferrals. Ask your workforce to be allowed to transfer salaries and wages in two monthly batches. Use funds such as short-time work benefits to temporarily reduce financial obligations. And always remember: In a crisis, positive leadership is particularly important (external link).
  3. factoring: By outsourcing your receivables, you can realize enormous time savings for your liquidity management. In plain language, factoring means nothing other than that you receive immediate payment for every invoice issued if you sell your claim resulting from this invoice to a service provider for a comparatively moderate fee.
  4. Inform: In connection with the Corona crisis, e.g. For example, certain restrictions of insolvency law continue to apply (external link). Probably the most important is that companies that are purely factually solvent will generally not have to file for bankruptcy by the end of 2020, even if they become over-indebted due to the Corona crisis. So there is a lot to be said for staying on the ball and not least understanding your own liquidity management as a key instrument for corporate survival in times of crisis.

Is your company in trouble? Use our service: Subsidy check, “Find a sponsored management consultant” or direct information on the phone number 0800 58 95 50 (free of charge).