Liquidity Management & Cash Flow

Liquidity analysis is a core component of financial management, allowing companies to ensure solvency and improve financial stability. But how do you ensure your business remains solvent at all times? In this article, we look at what a liquidity analysis is, how it works, and which methods you can apply.

Every company has to deal with regular and one-off payments every month. These include salaries, rent, tax payments, insurance premiums, and loan repayments, as well as repairs, acquisition costs, and marketing expenses. These costs must be settled either immediately or within a payment term. Salaries are usually paid at the end of the month, while taxes and loan repayments are due monthly or at specific intervals. This can lead to a high financial burden at certain points in time.

Anyone running a business knows that things often turn out differently than planned. If you only think in one direction at the start, internal and external factors you didn't account for can force a company to rethink or even change its strategy, and often you may not be flexible enough to react to favorable events. That is why it is important for entrepreneurs to play through various scenarios and prepare potential strategies. Setting up scenarios can serve as a decision-making aid for strategic alternatives and help in developing concrete strategies for unexpected internal and external events. Scenarios are primarily used in financial and liquidity planning to better estimate changes in cash flow and avoid liquidity bottlenecks.

Startup life is rarely routine. Every day is different from the last and usually quite different from what was planned. Decisions must be made quickly, alternative strategies developed, and flexible action enabled. To ensure this, employees often take on high levels of responsibility and decision-making power. A large portion of the decisions to be made during a startup's growth phase involves expenses—whether it's subscriptions for essential services, office furniture and tech for new colleagues, or simply a team brunch at the office. In the past, you had to go to the boss or an assistant every time, explain your request, and borrow the only available credit card along with the linked phone to receive the TAN. That cost time and nerves—something that is inherently scarce in a startup.

As a startup founder, company liquidity is a critical topic that you deal with on a daily basis. What is the current liquidity situation? How long will the money last? What levers can be pulled to save money? And what measures can be taken to bring more capital into the company? These questions and their answers are not only of interest to internal stakeholders, but also to external investors such as business angels, VCs, etc., who naturally want to be informed at all times about the current liquidity status of the startup they have invested in.

Since 2020, the coronavirus pandemic has made thoughtful liquidity management indispensable. Business owners suddenly had to deal intensively with their finances to steer their companies through the crisis. Government aid, such as short-time work allowances and bridging aid, helped many to bridge short-term liquidity bottlenecks. In addition, 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 to ensure you are well-positioned financially for the future.