Liquidity in times of the pandemic

1. Corona makes liquidity a topic for everyone

Even business owners who previously didn't worry about their liquidity have had no choice since 2020. Thoughtful liquidity management and regular liquidity planning were and are the be-all and end-all for every entrepreneur to successfully lead their company through such uncertain times. Hindsight is always 20/20, but you should take this realization, which you have now gained thanks to Corona, as an impetus to stop putting off your own liquidity planning and start tackling it now. Knowing about your existing payment obligations and income, rather than just having a "gut feeling" about them, makes the entrepreneurial difference – and Corona has made that even clearer.

The business has to remain closed for weeks, the construction contract is put on hold at the last minute, or one of your most important customers has filed for insolvency – since the beginning of the Corona crisis, just about every imaginable entrepreneurial nightmare has become a reality. The often drastic drops in sales have put many entrepreneurs in a financial predicament that negatively impacts liquidity and can have far-reaching consequences for the company.

2. Corona-related measures for short-term liquidity security

To help companies counteract this predicament, the government has passed extensive measures to secure liquidity.

Short-time work allowance

By applying for short-time work allowance, the often significant personnel costs can be significantly reduced in the short term. Short-time work reduces your employees' working hours, and the resulting wage difference is partially compensated by the Federal Employment Agency. This is intended to help companies better manage their liquidity while also avoiding layoffs. Funding through short-time work allowance has been extended until the end of 2021. You can find all important information and requirements regarding short-time work allowance on the Federal Employment Agency website and on the website of the Federal Ministry of Labour and Social Affairs.

Government aid

To give affected companies the opportunity to react to the effects of Corona and secure their solvency, government aid packages have been put together. These include Bridging Aid I-III, the November and December aid, and the "Neustarthilfe" (Restart Aid). The Restart Aid is intended for solo self-employed individuals who can only exercise their economic activity to a limited extent from January 1 to June 30, 2021, and have low fixed costs.

Bridging aid helps companies with an annual turnover of up to 750 million euros, solo self-employed individuals, freelancers, and non-profit companies and organizations that have high Corona-related revenue losses to cover their fixed costs. The extraordinary economic November and December aid supports associations, companies, and self-employed individuals affected by Corona-related losses starting from November 2, 2020, with a one-time grant of up to 75% of the revenue in November or December 2019.

All information on current funding, application deadlines, and application forms can be found on the website of the Federal Ministry for Economic Affairs and Energy and the Federal Ministry of Finance: www.ueberbrueckungshilfe-unternehmen.de.

3. Internal company options for securing liquidity

In addition to the Corona-related measures described, there are ways for companies to optimize their own liquidity internally.

Optimizing invoice management

Optimizing your own invoice management can help you free up liquid assets and secure your liquidity in the short term. The following measures will help you do this:

1. Timely and accurate invoicing:
   To achieve fast payment, invoicing should take place as soon as possible, ideally one day after the service is provided, and contain all necessary information in the correct format. Incorrect invoices are often not accepted by companies and have to be reissued. A double-check is therefore worth it.
2. Agreeing on extended payment terms with suppliers:
   Liquidity suffers when payment terms for purchases are shorter than for sales. Therefore, you should talk to your suppliers about extended payment terms. With a good working relationship, extending the statutory payment term of 30 days to a net payment term of 60 days, with a 3% discount for payment within 30 days, is quite realistic.
3. Achieving faster incoming payments:
   Through shorter payment terms or offering a discount for early payment, customers who take longer to pay can be motivated to pay quickly. However, the discount should definitely be taken into account in your price calculation so that your profit does not suffer.
4. Consistent receivables management:
   The service has been provided, but the customer isn't paying? That is not only annoying but also bad for your liquidity. To avoid this, you should define a clear payment date in the invoice instead of a time period. This clear specification leaves no room for misunderstanding on the customer's side.

Structural changes

Beyond short-term measures, liquidity can be improved in the medium to long term through structural, internal changes. These adjustments will help you secure your liquidity:

1. Reducing inventory and stock levels:
   Stock ties up capital and increases the risk of loss, spoilage, and theft. Keep inventory levels only as high as necessary to ensure smooth production.
2. Preventing payment defaults and delays:
   By regularly and diligently checking your customers' creditworthiness, you keep the risk of payment defaults low.
3. Considering debt restructuring:
   Check whether prolonged financial bottlenecks, previously covered by an overdraft facility, could be better financed through a regular, long-term loan.
4. Reviewing investments:
   Compare prices and costs and carefully consider the right timing for an investment.
5. Leasing out fixed assets:
   Fixed assets that are rarely or never used, such as empty office or storage space or machinery, can be leased out or shared with other companies.
6. Uncovering forgotten subscriptions:
   Review your (software) subscriptions and critically evaluate their usage. This is often where unexpected savings potential lies.

4. Planning and managing liquidity

Even though it is clear that liquidity management is a vital tool for business success, it is usually only a fixed component in the finance departments of larger companies. Due to the pandemic, liquidity management has gained more importance and attention for many businesses, and this should not change after the crisis. With Tidely, we provide companies with a liquidity management tool that shows them in real time how adjusting the individual levers described affects their liquidity. Tidely accompanies you on the path to successful liquidity management—even after the pandemic.

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