What is liquidity management? Definition, methods & tools

What is liquidity management? definition

Liquidity management comprises Monitoring and managing a company's ability to pay. The aim is to ensure that sufficient liquid assets are available at all times to pay liabilities such as salaries, invoices or loans. Without effective liquidity management, a company can quickly run into financial difficulties — even if it is profitable.

Liquidity management is particularly important for small and medium-sized enterprises (SMEs), as they often have fewer financial buffers than large companies. An unexpected loss of income or a delay in settling claims can quickly lead to a bottleneck. With a functioning liquidity management system, you always have the full overview of your deposits and withdrawals, so that potential bottlenecks can be identified at an early stage and actively addressed.

Reading tip: What does liquidity actually mean? We will answer these and more questions in our blog article”Everything you need to know about liquidity”.

The tasks of liquidity management: planning, monitoring, controlling, analyzing

Liquidity management comprises a range of tasks aimed at: Ensuring the solvency of a company. The most important basics include:

Liquidity planning

Liquidity planning is the start of liquidity management. In doing so, all expected deposits and withdrawals Your company recorded for a specific period of time and presented in a liquidity table. This planning shows you when which funds are needed and whether there are enough reserves available to meet your payment obligations. It is important that you make realistic assumptions about future money flows — based on historical data and market forecasts.

Liquidity monitoring

Another important part of liquidity management is continuous monitoring of cash flows. This includes the regular Control of actual deposits and withdrawalsto identify deviations from planning and, if necessary, take corrective measures.

Liquidity management

At the Liquidity management Is it about that targeted taxes on cash flows. Companies actively decide when they want to make payments and collect receivables in order to use the available funds as efficiently as possible. For example, management may consist of choosing suppliers with longer payment terms or taking advantage of discounts through previous payments, depending on the current liquidity situation.

Analysis and reporting

Last but not least, analysis and reporting also play an important role in liquidity management. In doing so, you compare the actual cash flows regularly with the planned liquidity, for deviations to identify and analyze the reasons for this. These findings help to identify weak points and to constantly optimize liquidity management.

In addition, reporting regular reports about current and future liquidity, which provides management and other stakeholders with a transparent basis for decision-making offer. Another advantage: The analysis of past payment flows makes it possible to learn from previous developments and to make future decisions on a well-founded basis.

Good liquidity reporting also strengthens the basis of trust with banks and investors. A precise analysis makes it possible to identify potential bottlenecks at an early stage and to initiate appropriate countermeasures.

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Liquidity Management Tools: An Overview

There are various ways in which companies can organize their liquidity management. Each method has its advantages and disadvantages:

1. Decide based on gut feeling

Some companies rely primarily on their gut feeling and hope that everything goes well. This is risky, of course — without clear data and analyses, much is left to chance, and this can easily lead to bottlenecks and is more negligent from a business point of view.

2. Hire an expert

Another option is to hire someone for financial responsibility. This provides more expertise and better control. However, this option is often not cost-effective, especially for SMEs.

3. Use an Excel spreadsheet

The most common method that many companies use is to create a liquidity table in excel. This table gives you a structured overview of all deposits and withdrawals and helps to visualize planned and actual cash flows. But Excel lists can also quickly become confusing, time-consuming to maintain and prone to errors.

4. Use online tools

The more complex the company is, the more important it is to have a real-time overview of liquidity at all times. This is where specialized liquidity management software comes in. This gives you a modern and reliable solution that allows you to easily and securely manage your liquidity — clearly, automatically and without manual errors. This is also the case with Tidely — Book a free demo directlyto experience the benefits of professional software for your liquidity management first hand.

Liquidity management with Excel: How to create a liquidity table

If you opt for liquidity management with Excel, here are clear step-by-step instructions on how to create a liquidity table:

1. Set time period: Define the period of time that you want to plan. Weekly, monthly or quarterly tables are usual, depending on the planning needs of your company.
2. Record deposits: Enter all expected deposits, such as customer payments, loans, or other inflows. It is important that the due date of the deposits is taken into account — i.e. the time when the amounts are credited to the account.
3. Record payouts: Record all regular and one-time payouts, such as salaries, rental costs, supplier invoices, and taxes. Here, too, it is crucial when these payments actually have to be made.
4. Calculate liquidity status (liquidity level 1): To determine the current liquidity status, subtract payouts from deposits. A positive balance means that you have liquid funds available at the end of the period, a negative balance indicates an imminent liquidity gap. This corresponds to liquidity level 1 (cash liquidity). This indicates how high the immediately available means of payment are in relation to the current liabilities. Depending on the company structure, it may also be useful to calculate liquidity levels 2 and 3 in order to obtain a complete picture of the financial situation.
5. Review and adjustment: Update the spreadsheet regularly to respond to changes in cash flows. This allows you to keep control of liquidity.

If you don't have a template yet, you can simply use our free Excel sheet download for liquidity planning.

Optimize liquidity management with software

As your company grows, so do liquidity management requirements. In order to remain efficient in the long term, a modern liquidity management tool such as Tidely the best choice. Such software solutions automate many tasks and help you manage your liquidity efficiently and in real time, while at the same time ensuring greater transparency for all financial managers.

The software provides a real-time monitoring, Analyzes your deposits and withdrawals and makes forecasts so that you Identify potential bottlenecks at an early stage and be able to react quickly. Tidely also automates many processes, such as creating reports or retrieving bank details. If there are critical changes, such as impending liquidity problems or missing payments, you'll notice it right away.

All of this offers you a user-friendly and intuitive platform that makes dealing with complex Excel spreadsheets superfluous and significantly simplifies your liquidity management.

Cash and liquidity management in times of crisis

In times of crisis — whether through Market fluctuations, Sales losses or pandemics — good liquidity management is becoming even more important. If income suddenly disappears, you must act quickly and decisively to ensure your company's solvency. In such times, solid liquidity management makes the difference between success and failure.

If your liquidity plan shows an impending bottleneck in the coming weeks or months, you should act immediately to avoid negative effects. It's better to take action early than find out later that you've waited too long.

These measures ensure that your company remains liquid even in difficult times:

• Liquidity buffer build to absorb unforeseen expenses
• spending prioritizing and postpone payouts if necessary
• Short-term financing or Credit options consider to bridge liquidity bottlenecks
• factoring utilize, to quickly convert outstanding receivables into liquid assets and thus directly increase cash flow
• Make processes more efficient, e.g. through optimised production processes or the use of software
• Consistent reminders exhibitingas soon as your customers default on payment
• Prefinance fewer goodsto save cash

The balance between liquidity and profitability

Staying liquid is one thing, being profitable is another. Good liquidity doesn't automatically mean that your company is profitable. It is important to find a balance between liquidity and profitability.

• liquidity ensures that the company can meet its short-term payment obligations at any time.
• profitability ensures that the company makes long-term profits and remains profitable.

Without sufficient liquidity, a company's survival is not guaranteed — even if profits are made. Because liquidity means Ability to act, and as soon as this is missing, the entire company is at stake. A profitable company may well fail if it does not have enough liquid assets to maintain ongoing operations.

However, too much liquidity can also be problematic — unused capital remains in accounts, generates no return and hinders growth in the long term. You should Using surplus funds in a targeted mannerto secure investments and strengthen your company in the long term.

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Investment strategies for liquidity — how to use surplus funds correctly

If your company has more liquid assets than is necessary to cover running costs, you can use them specifically to both secure liquidity and promote investments. Here are some clever strategies to help you do just that:

Short-term investments

Invest excess capital in secure investments such as overnight money or fixed-term deposits. These offer moderate returns without jeopardizing your liquidity, as the funds are available at any time or are only tied up for a short time.

Investments in core business

Use free funds to invest in your company. Whether in new machines, technologies or personnel — these investments increase your efficiency and drive growth in the long term.

Innovation and product development

Investments in research and development help bring new products or services to market. This not only increases sales potential, but also ensures the company's competitiveness in the long term.

risk management

Build up additional liquidity buffers to protect your company against financial risks. A stable liquidity buffer helps you to remain liquid even in times of crisis.

Optimization of payment terms and receivables management

Optimize your payment terms and receivables management to improve cash flow. Incentives for your customers, such as discounts, help ensure that invoices are paid early. At the same time, you should negotiate payment terms with suppliers skillfully in order to delay your own payouts as much as possible.

Consistent receivables management ensures that outstanding receivables are settled on time and unnecessary liquidity gaps are avoided.

Conclusion: How to optimize liquidity management in a company

Effective liquidity management requires clear planning and smart management — and with the right tools, this process can be significantly simplified. The key to success lies in automation. Software solutions such as Tidely enable you to monitor payment flows in real time, identify bottlenecks early on and optimally manage investments. Instead of laboriously planning manually, Tidely helps you keep an eye on your finances and remain able to act at any time. In this way, you not only ensure short-term liquidity, but also lay the foundation for long-term success and growth.

FAQ

What is liquidity management?

Liquidity management includes methods to monitor and manage a company's ability to pay. The aim is to have enough liquid funds available at all times to make all payments.

What is a liquidity manager?

Liquidity management is usually carried out by a company's finance department or treasury. In small companies, the managing director (CEO) or the financial manager (CFO) often takes care of this personally. Liquidity management is responsible for planning, monitoring and managing a company's cash flows. The main task is to ensure the company's solvency and avoid financial bottlenecks.

What is cash management?

Cash management comprises all measures to monitor, manage and optimize a company's cash flows. The aim is to ensure liquidity, i.e. to ensure that there are enough funds available for current payments, and at the same time to make good use of excess funds.