Securing liquidity is essential for companies to survive severe crises such as the current corona crisis. If liquidity is not well managed, entrepreneurs and management have to take countermeasures as quickly as possible. Eliminate unnecessary cost items after searching for them in detail beforehand. The main goal: to avoid imminent insolvency in any case.
What does liquidity mean?
Liquidity is the ability of a company to fulfil the payment obligations in a timely manner with the existing cash flow. The degree of liquidity indicates how well the company manages the cash flow. There is a differentiation between relative and absolute liquidity. The term coverage ratio is used synonymously. In order to be able to pay for deliveries of goods and salaries, the company needs short-term funds available from credit. Liquidity management includes all measures to improve liquidity. If the company has financial plan liquidity, its available means of payment always exceed the due liabilities. Asset liquidity refers to the ability to use assets for payments due or to exchange them for cash.
What options do companies have to secure their liquidity?
1. What you can do about capitalization?
- Reduce private withdrawals to a minimum.
- Increase the company’s equity share with a cash contribution.
- Sell unnecessary funds, even if it is a losing deal.
- Take on new shareholders who bring capital.
- Explore other external financing options.
- Talk to the house bank to increase the credit line.
- Talk to the tax office to defer the tax payments.
- Apply for a liquidity loan from the KfW bank.
- Your employees don’t know how the company is doing? This is bad. Take them on board and build on their creativity.
- last but not least: invest existing capital as profitably as possible.
2. How to directly increase business assets
- Record income and expenses for the next six months in a liquidity plan and get a better overview of your finances.
- Sell unnecessary resources (machines, furniture, IT equipment).
- Does your sales representative really need a car when he doesn’t visit customers?
- Cut non-profitable business areas (production, services, etc.).
- Combine your strength with products that generate the highest profit.
- Can you have components manufactured or purchased at lower cost externally?
- Buy supposed little things inexpensively or do without entirely to secure your liquidity, for example with office supplies and magazines. A penny saved is a penny got.
- Avoid any investments or postpone them to the future.
3. How to redesign customer relationships to increase liquidity
- Hand over invoices to customers as soon as possible, best directly with the delivery, do not wait.
- Keep payment terms for customers short.
- Grant a cash discount and thus increase the incentive to pay quickly.
- Your customers are also not liquid? Then offer payment in installments. Some money is better than none.
- recalculate your product prices and make sure you earn enough.
- Offer your customers direct debit to avoid forgetting or delaying payments.
- Depending on the order and customer, a down payment may be possible. Then you do not need to go all in in advance.
- Check accounts receivable thoroughly and stay alert when a customer pays late.
- Ensure liquidity through active receivables management: remind unpaid invoices when the payment term has expired.
- If necessary, turn on a collection agency and / or have a reminder sent.
- If it is possible to sell receivables (factoring) in order to secure liquidity.
- Offer discounts to cash payers.
4. How to optimize supplier relationships to ensure liquidity
- Talk to your suppliers openly. It would be negligent to sweep the issue under the table. You could lose important suppliers forever.
- Negotiate with them about longer payment terms.
- Sometimes it is worth taking advantage of the supplier’s cash discount and using the credit from the house bank.
- Purchasing: Get several offers and compare exactly.
- Reduce your inventory.
- Buy only small quantities and calculate at short notice. Don’t be impressed by volume discounts.
The procedures mentioned here to secure liquidity are mainly suitable for bridging short-term bottlenecks. Although they lead to an improvement in liquidity, they can mean a higher burden in the long term. In order to permanently secure liquidity, they should only be used in companies with more positive entry prospects.