Insolvency or insufficient liquidity is one of the most common causes of corporate bankruptcies. Not infrequently, the ability to have sufficient liquidity can be decisive in competition. But what is good liquidity and how do you know if your solvency is good or not? Well, everything is relative – and that also applies to business administration. However, there are a few things to consider. Here are 4 important tips on how you can sustainably strengthen your liquidity.
4 Tips For Better Liquidity
1. Get an overview
If you want to know exactly how your liquidity is doing, or whether there are any bottlenecks, you need to be clear about where your business is financially. Liquidity plans can give a good overview of your company’s liquidity and solvency. This is a dynamic plan that continuously takes into account changes in income, expenses and cash flow. This plan is usually created for a relatively short period of time (a few months), which helps the accuracy of the calculations.
With the help of the liquidity plan, you can keep track of your financial situation and take precautionary measures in good time so that you can meet payment obligations even at the end of the observation period. Thanks to the forecasts, you can anticipate what will happen and, if necessary, plan for times of poor liquidity. This gives you the flexibility you need to implement new ideas and grow with sufficient liquidity, but also to take advantage of financing offers in the event of liquidity bottlenecks, for example.
2. Reduce your outstanding debts
Liquidity bottlenecks are often caused by unpaid bills. There should actually be money, but a customer doesn’t pay. Well-structured accounts receivable management can help ensure that payments from customers are received more quickly. The first step is that invoices are sent early – i.e. immediately after the service has been provided. You can also agree on clear payment terms and conditions. Check the incoming payments regularly; in the event of delayed payment, send a reminder in good time. A friendly but consistent dunning process with short and fixed dunning cycles is recommended. If your service extends over a longer period of time, send the customer down payments or partial invoices. Check the creditworthiness of your customer or have your customer claims insured against failure. Another way of overcoming liquidity bottlenecks caused by high outstanding debts is factoring. A company sells a receivable, i.e. an open invoice, to a factoring company and usually receives up to 90% of the receivable paid directly. The claim then belongs to the factoring company, which then asserts it against the customer. This way, there is no liquidity bottleneck for the company. which then asserts this against the customer. This way, there is no liquidity bottleneck for the company. which then asserts this against the customer. This way, there is no liquidity bottleneck for the company.
3. Consider leasing as a financing alternative
No matter what industry you are in, investments must be carefully considered. For example, only invest in production facilities if capacity utilization is largely guaranteed. If there is a peak in orders, you should consider alternatives such as renting or leasing instead . Because it is not the ownership of an asset that brings the income, but its use. Almost everything can be leased – e.g. commercial vehicles, machines, office equipment or software and hardware. The advantage: ideally, you pay the leasing rate from the income generated by the property, thus protecting your liquidity.
4. Keep your costs down
The monthly costs that companies incur include rent, telecommunications costs, material costs, wages, insurance, travel expenses and many others. In order to increase your liquidity, it is advisable to keep an eye on your expenses and keep them low if possible. This is often not easy and very time-consuming – but it is worth it. Every euro saved strengthens liquidity and increases profits. For example, negotiate prices with your suppliers on a regular basis and also obtain competitive offers. A change of insurance or telecommunications provider can also pay off. You should always put higher investment projects to the test and question the cost / benefit ratio.