Are you an entrepreneur and facing a liquidity bottleneck? As a rule, several reasons come together at the same time – and then you slip into a liquidity bottleneck. The checklist to fix the crisis involves these steps:
- Address the topic immediately. Now it’s about rolling up your sleeves! Every day counts. Tackle it. A liquidity bottleneck can cause your company to go bankrupt. It is important to prevent this. All other issues are slipping backwards. Create space for yourself.
- Look for professional support. You need a clear overview of your finances and a rescue plan. This is where management consultants who specialize in medium-sized companies help. With an experienced consultant at your side, you will get out of the liquidity crisis step by step.
- Work out solutions. Together with an SME consultant, you will work out solutions. This may include, for example, a bridging loan. The bank talk for this must be prepared professionally. You need to convince the bank that your company is worth it to stay – and that you can repay the loan.
A business example from practice
A request that has reached one of our management consultants: A successful painter and owner of a limited liability company with ten employees has a liquidity bottleneck. He’s already got enough orders for the whole year. The problem: It’s February and in the short term he has to pay bills and his employees. He is in a typical financial crunch. Actually, the company is doing well. And yet it has a liquidity bottleneck that needs to be bridged.
How to save a business in crisis: 3 steps
Solving a liquidity bottleneck: Professional advice
Take advantage of the opportunity to contact a management consultant from your region. There is often funding for advice. As a result, you pay significantly less for the advice. With a consultant on your side, the chance of you eliminating your bottleneck is much greater.
- More security thanks to many years of experience
- Less cost due to good preparation
- Founder expert on site
How does a liquidity bottleneck arise? 10 Reasons
There are payment difficulties for a variety of reasons. In the short term, for example, the tax office, the bank or the social security funds want to have money. That is the occasion. But the causes are deeper. The company has a weakness. And that makes sure you don’t have enough money in your account.
If you need a bridging loan, you need to prove to the bank that you have recognized these weaknesses – and that you will take care of them.
So there is usually a short-term reason and fundamental causes. Causes of liquidity bottlenecks include:
Inputs
Companies often go into advance payments. The work will only be paid for later. However, if complications or discussions occur during the course of the order, the payment is gladly withheld. For large orders, this can lead to an existential risk.
Winter
In the hospitality industry, for example, sales often fall in winter. There is a simple seasonal reason for this. In the cold season, fewer people go out. At the same time, however, the costs for employees continue.
Deficit location
Some companies are generally doing well. But there is a kind of “black sheep”. A loss-making location is pulling the whole company down. In good times, it is still possible to look generously at it. But if other factors cause revenue to plummet, the loss-making location quickly drags the company into the abyss.
Bloated staff structure
Some young entrepreneurs take over an existing business. In the event of such a succession, they also take over the staff. The problem: Often there are simply too many employees on board – compared to the revenues. This permanently reduces profits. If a crisis occurs, the company quickly slips into a liquidity bottleneck.
Low margins
Some companies drive a lot of sales. But the profit that is left in the end is too small. The low margins mean that the company is floating on the precipice all the time. Here, too, you may be running out of liquidity. Unclear financial planning means you will be late to see the problem.
Delayed incoming payments
The payment ethic of many customers leaves something to be desired. For companies without organised payment management, this can lead to an existential crisis. It is often the case that there is not “constant lag” in whether the payments arrive on time. If many customers do not transfer and money is suddenly needed at short notice, there will be a liquidity shortage.
Unprofitable branches
Some companies are very successful on the market. At the same time, however, they offer a wide range of services and products. Similar to a loss-making location, the unprofitable branches of operations are a cause of the lack of liquidity.
Too high private savings
While in a limited liability company the owner is permanently employed. In this area, it may happen that business owners or self-employed persons make excessive private investments. Suddenly, additional payments occur or a sales order breaks away. Again, money is quickly missing from the account.
Tax repayments
Receivables from the tax offices regularly lead to liquidity bottlenecks. A common reason: The company has to make a tax repayment – and at the same time, the advance payments are adjusted. This leads to a double burden. In fact, the tax advisor would have to sound the alarm at an early stage. Unfortunately, this is not always the case.
Semi-finished work
One job after another comes in. Actually a good thing. The problem: Smaller companies with few employees get bogged down quickly. They have many different projects and do not finish them. This means that you work all the time, but you can’t write invoices. This, too, leads to liquidity problems.
Bridging liquidity bottlenecks: the road to the bank
Many entrepreneurs are trying to bridge the liquidity bottleneck by going to their bank. Basically an understandable idea. However, you should prepare the bank conversation professionally.
Do you need a refurbishment report?
Some banks are demanding that the company prepare a restructuring report during the crisis. Here, too, you support management consultants who prepare these restructuring reports according to a certain standard required by the banks.
You need complete clarity about your figures. You need to prove to the bank that you have identified the causes of the lack of liquidity and come up with a plan for how you want to eliminate this. Here a management consultant helps, with deep business knowledge. Often the consultants also have good contacts with the banks. And you have experience from many industries.
How can I avoid liquidity bottlenecks in the future?
They need liquidity. It’s like gasoline in the tank. Accordingly, you should develop liquidity planning and liquidity management for the future with the management consultant. The liquidity plan is a key tool for managing your business. Make it your routine to review and update the liquidity plan every day or at least once a week.
Create a liquidity plan
Basically, a liquidity plan lists the income and expenses. Deposits or receivables include the invoices paid. Payments include personnel costs (wages, salaries, social security contributions), purchases of goods, room costs, office costs, insurance, advertising, loan repayments, private payments and counselling. For example, write down in other columns how you want to compensate for possible underfunding. For example, through private deposits, current accounts or loans.
Are there any templates for a liquidity plan?
Many chambers of commerce and chambers of commerce and industry offer appropriate templates for a liquidity plan. Usually it is an Excel spreadsheet. You need to customize this Excel template to your individual company. The template should be so simple that you can and want to work with it every day. There is no point in storing a complex table somewhere and then not looking in.
Try to get a liquidity plan from your industry. This allows you to create your plan using an example and have realistic numbers. Alternatively, you should use a management consultant to create the liquidity plan. A regional consultant also knows the local banks. In addition, individual federal states have various support programmes for existing companies.
There are also various online tools for a liquidity plan. But to be honest, a simple Excel spread sheet. Especially since you can also save the table offline or send it to a consultant.
Definition of liquidity bottleneck in the company: What is it?
Liquidity means the ability to pay off its maturing liabilities at any time. The debtors can be banks, but also the tax office, social security funds or suppliers. Personnel costs are also an important factor. A bottleneck means that, for whatever reason, you are in payment difficulties. This quickly leads companies into existential crises that can lead to insolvency.
It is not a question of whether you are “incompetent” as a company owner or a limited liability company owner. Don’t do it yourself, but don’t blame others. Ultimately, you are responsible. Nothing can be changed about this. Address the problem and solve it.
