How to improve liquidity: Tips and Tricks

Definition and Basic Concept of Liquidity

Liquidity refers to the extent to which a company is able to meet its short-term obligations, such as bills or debts, without incurring major losses or delays.

Calculating liquidity with ratios: Current ratio and Quick ratio

The Current ratio indicates the extent to which a company is able to meet its short-term obligations with its current assets.

The Quick ratio is a stricter measure, because it excludes inventory, which is less likely to be converted into cash and thus improve liquidity.

Factors affecting liquidity

Ignorance and investing in assets such as machinery or real estate without considering the impact on liquidity.

Ignoring seasonality, not taking into account peaks and troughs in demand and income due to the negative impact of seasonal effects.

Poor communication between departments and lack of coordination between departments such as sales, purchasing and finance.

Solution: Accounts Payable and Payment Obligation Management

• Keep a detailed overview of all outstanding invoices, including suppliers, amounts, due dates and payment terms.
• Make optimal use of payment discounts when possible, provided that this does not burden your liquidity too much.
• Communicate with suppliers in a timely manner if there are payment problems or if you want to renegotiate payment terms, for example about longer payment terms or installments.
• Use automatic payments to avoid penalties and it reduces administrative burdens and human errors.
• Create a financial buffer to be able to pay unexpected obligations. This prevents stress and disruption of the relationships with suppliers.

Solution: Techniques for efficient accounts receivable management

• Clearly state payment terms on invoices, such as due date, possible discounts and late fees.
• Invoice immediately after delivery of products or services. Fast and error-free invoicing speeds up the payment cycle and has a positive effect on the financial position and will increase liquidity.
• Send timely payment reminders. Keeps payment top-of-mind with customers without straining the relationship.
• Perform a credit check before extending credit to customers. Reduces the risk of working with customers who may not be able to pay.
• Evaluate the effectiveness of your accounts receivable management regularly and adjust strategies if necessary.

Solution: Optimize Inventory Management

• Set optimal inventory levels, such as the minimum inventory needed to handle unexpected demand spikes or delivery delays.
• Analyze sales data and customer behavior to identify seasonal trends, demand spikes, and product declines.
• Use an automated system to track inventory levels, orders, and movements.
• Ensure that older inventory is sold or used before new inventory is purchased.
• Use historical sales data over time and predictive analytics to accurately estimate future demand.

Another solution: Financing options and loans

• Inventory your liquidity needs, analyze your cash flows to understand where and when shortages arise and whether the need is temporary, for example seasonal, or structural.
• Choose the right financing or credit form that suits the need. Such as:
• The current account credit: extra resources when needed, being overdrawn.
• The supplier credit: longer payment terms with suppliers.
• The usual bank loan: for larger investments.
• Financial Leasing: rent or payment in installments, suitable for purchasing machines or vehicles.

5 Tips to Keep Financing Costs Under Control

Tip 1: Compare interest rates and terms from different providers.

Tip 2: Invest borrowed money in initiatives that provide immediate or quick returns.

Tip 3: Use a short-term loan to maintain a financial buffer and only use the buffer for emergencies or unexpected expenses.

Tip 4: Consider paying off loans early if you have excess cash.

Tip 5: Keep your credit rating high by keeping debts within reasonable limits.

How to avoid negative impacts on liquidity

• Keep debt ratio manageable to avoid high interest and repayment obligations.
• Avoid long-term obligations such as expensive leases or fixed personnel costs when income is uncertain.
• Spread risk by not being dependent on just a few customers.
• Ensure multiple suppliers to avoid dependency on one party.
• Use financial reporting software to better estimate future liquidity needs and respond to risks early.
• Simulate worst-case scenarios, such as a decrease in income or an increase in costs, with this reporting software to be prepared.

Speedbooks automatically generates financial reports, allowing companies to spend less time on manual tasks and make faster decisions.

The software provides historical and current data that allows companies to analyze trends and make better strategic choices.

Financial reporting software helps meet legal requirements by generating standardized reports.