Liquidity in times of corona
Since 2020, due to the Corona pandemic, a well-thought-out liquidity management has become indispensable. Entrepreneurs suddenly had to engage intensively with their finances to steer their companies through the crisis. Government aids like short-time work compensation and bridging assistance have helped many to overcome short-term liquidity bottlenecks. Additionally, there are internal company measures, such as optimizing invoice management and making structural adjustments to secure liquidity. With Tidely, you can plan and manage your liquidity in real-time, ensuring that you remain financially well-positioned for the future.
1. Liquidity Becomes a Topic for Everyone Due to Corona
Even entrepreneurs who previously didn't focus on their liquidity have had no choice but to do so since 2020. A well-thought-out liquidity management and regular liquidity planning were and still are essential for any entrepreneur to successfully lead their company through such uncertain times. Hindsight is always 20/20, but the insights gained from the Corona experience should serve as a prompt to not delay your liquidity planning any longer but to tackle it now. Knowing your existing payment obligations and income not just "by feel" makes a significant difference in business, and Corona has made this even more apparent.
The business must remain closed for weeks, the construction project is put on hold at the last minute, or one of the most important customers has declared bankruptcy—since the start of the Corona crisis, nearly every conceivable business nightmare has become a reality. The often drastic drops in revenue have put many entrepreneurs in a precarious financial position, negatively affecting liquidity and potentially having far-reaching consequences for the company.
2. Corona-Related Measures for Short-Term Liquidity Security
To help businesses counteract this precarious situation, the government has enacted extensive measures for liquidity security.
Short-Time Work Compensation
By applying for short-time work compensation, usually significant personnel costs can be reduced in the short term. Short-time work compensation reduces your employees' working hours, and the resulting wage difference is partially offset by the Employment Agency. This is intended to help businesses better manage their liquidity and avoid layoffs. The short-time work compensation scheme has been extended until the end of 2021. All important information and requirements for short-time work compensation can be found on the websites of the Employment Agency website and the Website of the Federal Ministry of Labour and Social Affairs.
Government Aid
To give affected businesses the ability to respond to the impacts of Corona and secure their solvency, government aid packages have been put together. These include Bridging Aid I-III, November and December Aid, as well as Restart Aid. Restart Aid is intended for solo self-employed individuals who could only exercise their economic activity to a limited extent between January 1 and June 30, 2021, and who have only low fixed costs.
The Bridging Aid helps businesses with annual revenues of up to 750 million euros, solo self-employed individuals, freelancers, and non-profit companies and organisations that have suffered significant revenue losses due to Corona, to cover their fixed costs. The exceptional November and December economic aid supports associations, companies, and self-employed individuals affected by Corona-related losses, 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 aid, application deadlines, and application forms can be found on the websites of the Federal Ministry for Economic Affairs and Energy and the Federal Ministry of Finance: www.ueberbrueckungshilfe-unternehmen.de.
3. Internal Company Measures for Securing Liquidity
In addition to the described Corona-related measures, there are ways for companies to internally optimise their liquidity.
Optimising Invoice Management
Optimising your invoice management can help you free up liquid funds and secure your liquidity in the short term. The following measures can help:
- Timely and accurate invoicing:
To achieve fast payment receipt, invoicing should ideally occur within one day after the service is rendered and include all necessary information in the correct form. Incorrect invoices are often not accepted by companies and must be reissued. A double-check is therefore worthwhile. - Negotiating extended payment terms with suppliers:
Liquidity suffers when payment terms for purchases are shorter than those for sales. Therefore, you should negotiate extended payment terms with your suppliers. With good cooperation, extending the statutory payment term from 30 days to a payment term of 60 days net and a 3% discount for payment within 30 days is quite realistic. - Achieving faster payment receipts:
By setting shorter payment terms or offering a discount for quick payment, customers who take longer to pay can be motivated to make quicker payments. However, the discount should definitely be taken into account when calculating prices, so that profit is not negatively impacted. - Consistent accounts receivable management:
The service has been provided, but the customer is not paying? This is not only annoying but also harmful to your liquidity. To avoid this, an exact payment date should be defined in the invoice instead of a time period. This clear specification leaves no room for misunderstandings on the customer’s side.
Structural changes
In addition to short-term measures, liquidity can be improved in the medium to long term through structural, internal changes. These adjustments help secure liquidity:
- Reducing Inventory and Stock:
Inventory binds capital and increases the risk of shrinkage, spoilage, and theft. Keep inventory levels just high enough to ensure smooth production. - Preventing Payment Defaults and Delays:
By regularly and carefully checking your customers' creditworthiness, you keep the risk of payment defaults low. - Considering Refinancing:
Examine whether longer financial bottlenecks that have so far been compensated by the overdraft facility could be better financed through a regular, longer-term loan. - Reviewing Investments:
Compare prices and costs and carefully consider when the right time is for an investment. - Renting Out Fixed Assets:
Fixed assets that are not or rarely used, such as empty office and storage spaces or machines, can be rented out or shared with other companies. - Identifying Forgotten Subscriptions:
Review your (software) subscriptions and critically assess their usage. Often, there are unexpected savings potentials hidden here.
4. Planning and Managing Liquidity
Even though it is clear that liquidity management is an important tool for business success, it is often only a fixed part of the finance department in larger companies. Due to Corona, liquidity management has gained more importance and attention for many companies, and this should not change after the crisis. With Tidely, we provide companies with a tool that shows you in real-time the impact that adjusting the individual factors described has on your liquidity. Tidely accompanies you on the path to successful liquidity management—also after Corona.
