Managing liquidity

Stay flexible and liquid

As an entrepreneur, you want to ensure sufficient liquidity for planned investments while also investing surplus funds sensibly. We answer your key questions.

Key questions for entrepreneurs

Does my company have “excess liquidity”?

You can tell whether your company has excess liquidity by breaking it down into three different types: operating liquidity, strategic liquidity, and excess liquidity.

Operating liquidity covers your company's regular expenses. It should be held in a bank account because you need to be able to access these funds at any time.
Strategic liquidity is used to finance your medium-term strategic planning, e.g., growth or replacement/expansion investments.
Excess liquidity are any funds that you do not need for day-to-day business and that are not set aside for strategic purposes, i.e., what is left over after you subtract operating and strategic liquidity from your entire cash portfolio. You can invest this surplus as you wish.

How much cash do I need for my day-to-day business?

The basis for short-term liquidity management (and thus for day-to-day business) is based on past experience and budget planning.

Ask yourself the following questions:

What were the company’s monthly expenses in the past (e.g., for purchasing goods, wages, social insurance contributions, rent, insurance)?
What other regular expenses are incurred less frequently (e.g., once a year)? These can be tax or dividend payments, for example.
How seasonal is the business? By how much can income and expenses fluctuate over the year? The more uncertain a company’s liquidity planning, the greater the need for reserve liquidity.
When and how reliably do customer payments arrive and how quickly must creditors’ receivables be settled? Is there potential to improve the ratio between tied working capital and sales (e.g., by improving accounts receivable and accounts payable management or warehousing through digitization)?

To calculate the necessary liquidity buffer, it is also worth taking a look at the past: the more cyclical an industry is, the more conservative a company's financial policy and liquidity management needs to be.

These questions help you to estimate the cash requirements (or “operating liquidity”) necessary for day-to-day business. Your company must always be able to access this liquidity, even in difficult economic times when your creditworthiness may be negatively impacted. Liquidity, which must be available at short notice and at all times, should be held in a bank account.

When and to what extent should I use an existing credit limit from my bank?

If a company has a very high level of liquidity that is not directly set aside for operational use or to pay dividends to owners, it may be sensible to use the company’s own funds to make planned investments. This depends on the strategy of the company and the owner.

Otherwise, it is expedient to take out a loan or apply for a lease for part of the investment to ensure your business stays flexible.

You want to see both sales figures and a forecast of earnings and cash flows for the next three to five years, as well as the results from recent years and the current financial year.
A balance sheet and the current financing situation are also important. The consistency of the data presented has a significant impact on the credibility and attractiveness of a company to potential investors.
To increase the likelihood of a positive initial investor assessment, aside from the financial information, a clear presentation of the USP, a convincing and experienced team and a realistic market view (including a competitor analysis) should be presented.

When is liquidity with credit balance fees a sensible solution?

To be able to cover your company’s regular expenses, operating liquidity should be held on a bank account to ensure it is always accessible. However, this amount does not necessarily have to include only the above-mentioned operating liquidity; it can also include part of the strategic liquidity. Depending on your company's specific needs and the threshold set by UBS, a credit balance fee can also be cheaper than the price of illiquidity.

How can I invest excess liquidity sensibly?

How can liquidity be actively managed?

The important thing is to have a plan. This is because liquidity planning is of central importance for companies. It shows on a rolling basis whether, or when, a liquidity bottleneck may occur and the extent of any potential financing gap. This allows you to take measures at an early stage to provide the liquidity you need or to find an appropriate balance.

You can influence liquidity inflows by doing the following:

Write and send invoices to customers without delay.
Set short payment deadlines and always send reminders about overdue invoices.
Agree down payments and on-account payments with your customers.
Optimize your warehouse and supplies.
Sell any fixed assets that are no longer needed.
Raise additional funds from third parties and/or owners.

You can reduce liquidity outflows by doing the following:

Negotiate longer payment terms with your suppliers.
Check where you can reduce costs, e.g., for personnel (including shorter working hours), rent and operations.
Review procurement prices regularly and negotiate price reductions.
Postpone any non-urgent purchases and maintenance work.
Lease or rent equipment instead of buying it.
Reduce owner remuneration to a minimum.

When are excessively high liquidity reserves a problem in strategic decisions?

The sooner you need cash, the less attractive your options become: the credit balance fees on bank accounts, money market funds or time deposits reduce your capital instead of increasing it.

Nevertheless, liquidity on a bank account can be an option, provided you are willing to accept this credit balance fee in return for full access to your liquidity at all times. On the other hand, the longer you can wait before liquidating your investments, the more attractive your options become.

Funds are an ideal way of investing excess liquidity – they are usually highly diversified, which reduces risk, and can be sold within a week even in times of crisis. In addition, there are so many different types of fund that they are suitable for every form of liquidity.

A well-planned transfer of excess liquidity into private assets may also make sense. This can allow you to initiate and plan for a possible company handover at an early stage or to compensate for any previous private investments in the company, for example, through the receipt of extraordinary dividend income.