Liquidity & Cash flow

Cash flow: Securing liquidity for your business success


Cash flow and liquidity planning and management are central tasks in every company. However, increasingly complex markets pose a major challenge and lead to uncertainties. Find out how you can nevertheless secure your cashflow and sustainably improve your liquidity in our articles.

What does liquidity mean? A definition



Liquidity is the ability to meet all payment obligations at the agreed or required time. In companies, for example, this relates to wage costs, rent, ancillary costs or outstanding invoices.




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Cashflow and liquidity planning

In order to guarantee your cash flow and thus the success of your company, a functioning liquidity planning is indispensable. The primary goal of this planning is to ensure that your company is solvent at all times. In doing so, the costs of payment transactions should be kept as low as possible, as should the costs of providing liquidity. Through effective liquidity planning, you provide risk management with the most important key figures and thus enable early action.

Ways to improve your liquidity

To improve your liquidity, there are various ways to keep track of your own finances.

Working capital management takes a look at internal processes (such as warehousing and production) as well as the handling of receivables from customers and the company's own liabilities. This balance sheet ratio provides information about a company's financial strength. 

Inventory management aims to tie up as little capital as possible in the company itself. With optimized inventory management, you always have exactly the right amount of goods in your warehouse, so that there are no bottlenecks but also no excessively high levels of capital tied up. Inventory management measures can include:

  • Reduce production in stock
  • Empty stock, e.g. through special prices or sales
  • Sale of non-essential fixed assets
  • Leasing of fixed assets, e.g. production facilities or office equipment
  • Sale-and-lease-back models - e.g. selling real estate and leasing it back
  • Checking planned investments for necessity
  • Outsourcing work steps that are cheaper to buy in than to do yourself
  • Financing the purchase of goods

Receivables management deals with receivables from third parties to protect your business from non-payment. Effective methods of receivables management can be:

  • Offer the most convenient payment methods possible
  • Work on invoicing
  • Invoice faster
  • Set shorter payment terms
  • Offer cash discount
  • Avoid payment defaults from the outset
  • Use factoring offers to get receivables paid directly
  • Optimize the dunning process to get as many defaulting payers to pay quickly and smoothly as possible
  • Optimize debt collection so as not to damage the relationship with defaulting customers too much
  • Assigning receivables that are not paid despite reminders and collection efforts
  • Outsourcing the entire order-to-cash process to a service provider

Liability management attempts to handle a company's own liabilities in such a way that liquidity suffers as little as possible. In this way, payment processes within the company are optimized in the long term:

  • Exploiting payment targets
  • Optimization of granted discounts
  • Supply chain finance
  • Rescheduling of short-term loans into long-term loans with lower interest rates
  • Debt equity swap: liabilities are exchanged for company shares. However, this measure is only used in the case of restructuring or shortly before insolvencies.

Securing liquidity in large corporations

In principle, the instruments mentioned above are effective and recommendable. In addition, however, there are other approaches that are often used by corporate groups:


Cash pooling

In the case of securing liquidity through cash pooling, the group parent company takes care of financial management. This involves a balancing process between the individual companies in a group: surplus liquid funds are withdrawn, and in the event of a shortage, loans are granted in the opposite direction (at standard market interest rates). Only when the Group's internal funds are insufficient are external funds called in. In the case of cash pooling, a distinction is made between a genuine and a non-genuine variant:

  • Genuine cash pooling: funds are actually transferred back and forth.
  • Non-genuine cash pooling (also: notional pooling): the account balances are only fictitiously compared and the interest is calculated on the main account.

In Germany, this practical solution to cash flow issues is legal and quite common, but the rules are not even comparable within Europe and can differ greatly.


Private Equity

Private equity refers to temporary capital for unlisted companies. Here, too, there are various common forms:

  • Management Buy Out
  • Leveraged buy out - leveraged acquisition
  • Private equity companies
  • Private equity funds


Spin-off involves the sale of parts of a company in which 100% of the respective division is sold. In such a case, shareholders are compensated accordingly through shares.
This form of securing liquidity is suitable, for example, if an innovative product or service has been developed that has good market prospects but does not fit one hundred percent with the parent company.


Equity carve-out

In an equity carve-out, only one part of a company is sold. This is usually less than 50% in order to retain decision-making power over the part of the company. The group thus retains control over the spun-off company, but can collect the proceeds from the sale.


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