Ensuring liquidity is essential for the success of a company and enables incoming invoices to be paid on time at all times. Otherwise, there is not only the threat of avoidable costs such as interest on arrears or reminder fees, but also, in the worst case, a trip to the insolvency court.
The word liquid comes from the Latin “liquidus” and means “liquid”. Accordingly, Wikipedia defines the term accounting liquidity as ” a measure of the ability of a debtor to pay their debts as and when they fall due“.
Liquidity management instruments
Liquidity management aims to ensure this ability. For this purpose, the income and expenses incurred in the past and those to be expected are compared. Ideally, these are categorized so that the largest blocks of income and expenses are visible at a glance.
But continuous cost controls (especially for leasing rates or license fees) and the exploitation of discount options are also part of this.
It is also important to monitor whether customers’ payment behavior changes negatively over time. Particularly in the case of larger sums, there could be serious consequences if companies are late in receiving their money. If necessary, the introduction of advance payments is then a way to avoid liquidity bottlenecks.
In addition, regular purchasing negotiations with suppliers can reduce costs. It may also make sense to look for alternative suppliers with more favorable terms or to insist on longer payment terms.
An additional aspect of liquidity management is the consideration of the customer or supplier structure and any associated dependencies. When income and expenses are spread over several shoulders, the entrepreneurial risk is reduced.
Liquidity management as a continuous process
Companies should not wait until the worst has already happened before tackling these tasks, i.e., when financial difficulties have arisen. Banks may then cancel credit lines or suppliers may terminate their cooperation due to a lack of incoming payments, so that the company can no longer process customer orders. This results in a lack of income. The result is a vicious circle that is difficult or impossible to escape.
A retrospective view of the company’s situation alone, for example as part of the annual financial statements, is also of little use. After all, liquidity management is about the future availability of sufficient cash. And this can be continuously improved on the basis of evaluated transactions.
Concrete facts instead of possible scenarios
It is true that liquidity management cannot predict certain events, such as environmental catastrophes or pandemics, which have an impact on the macroeconomy as a whole. It is also only possible to forecast the associated effects on one’s own company to a limited extent. However, continuous liquidity management based on real data protects companies from financial bottlenecks by ensuring the best possible liquidity at all times and pointing out potential dangers in good time.
