If you are looking for ways to improve the liquidity of your business, you are in the right place: We show you here why it is important to keep an eye on liquidity and what opportunities there are for companies to improve it.
Why are ways to improve the liquidity position of a company so important?
There are many ways to improve the liquidity of a company. Unfortunately, only a few companies make full use of these possibilities and sometimes even create a cash shortage for themselves. Many company managers only focus on turnover, but not on liquidity.
However, it is above all the latter that is decisive for the company's success, because without liquidity, the operative business cannot be financed. This in turn results in stagnating or even declining turnover. Liquidity therefore always comes before turnover. Only when this is in order can the company grow and increase its turnover.
5 ways to improve the liquidity position
1. Increase revenue
Raise prices
To increase revenue, companies have various options. For example, they can increase the prices of their products or services. Before taking this step, however, it is important to check whether customers are willing to go along with the price increases.
A company that operates in a highly competitive market and has a lot of competition often cannot raise prices, otherwise customers will switch to the competition.
Increase efficiency
Those who cannot increase their prices may be able to increase efficiency in the production process. Here, for example, it can be examined whether costs can be reduced by saving materials or whether the production volume can be increased by changing the process steps.
Improve products/services
In order to better justify price increases, one can improve one's products or services, e.g. by adding more features that offer customers added value. This also sets you apart from the competition and may even expand your target group.
2. Driving automation and digitalisation forward
Automating processes can save personnel, materials and other resources, for example. Typically, automation also increases efficiency, so that companies benefit from it several times over.
Automation can be introduced not only in manufacturing companies, but also in administrative areas. Software to automate marketing, sales, finance and HR processes saves companies resources in the long run, as employees no longer have to worry about working through routine processes.
Even if pushing ahead with automation and digitalisation initially involves investment costs, companies benefit from it in the long term and thus create competitive advantages for themselves.
3. Improve receivables management
A way to improve liquidity in short- and in long-term is to improve the accounts receivable management. Companies that have their customers pay mainly by invoice benefit most from this. In principle, an invoice should be sent to the customer immediately after the service has been rendered and not at the end of the month, as otherwise a lot of time passes before the invoice is paid.
Shortening payment periods can be useful if companies often have to deal with cash shortages. For customers with a poor payment record, for example, advance payments can also be agreed, or a complete prepayment. If a customer is in arrears, a payment reminder should be sent immediately. Software that keeps track of invoice due dates and automatically sends a payment reminder after the deadline has passed can be helpful here.
4. Use financing
In the case of acute or imminent cash shortages, it makes sense to use financing. Factoring, for example, is one way to get cash very quickly. The company sells its outstanding receivables to a factoring service provider and immediately receives a certain cash amount, regardless of when the receivables are due.
For some companies, leasing can also be a good way to improve their liquidity. Instead of making large investments in inventory such as machinery or vehicles, these can be leased for a monthly amount. This avoids tearing a hole in your liquidity.
5. Plan liquidity in detail
Anyone who wants to improve their liquidity in the long term must always keep an eye on it and draw up a liquidity plan. Seeing what the expected income and expenses will be in the coming months makes it much easier to manage cash and direct it to the right places in the company.
For example, if you assume that customer demand will decline in the next few months, you enter this in the liquidity plan with falling revenues and see how this affects the cash situation. Is a bottleneck looming? How long will the money last if revenues continue to decline?
The liquidity plan answers all these questions so that those responsible can make decisions early and prepare for the respective situation. Liquidity bottlenecks can thus often be defused before they even arise.
Summary: Companies can use several ways to improve their liquidity level
As you've seen by now, there are many ways to improve the liquidity of your business in the long term. Not all ways are equally suitable for all businesses, but some can be applied across all industries.
This includes driving forward the automation and digitalisation of business processes, as well as the precise advance planning of liquidity. In this way, companies lay the foundation for a future-oriented business: digitalisation and automation help to remain competitive, innovative and efficient; liquidity planning ensures that there is always enough cash for expenses and investments.
