In 2023, according to the KfW-Report, 11% of small and medium-sized enterprises in Germany rated their liquidity situation as highly problematic, and 18,100 businesses filed for insolvency, representing a 23.5% increase over the previous year. Medium and large enterprises were especially affected. Given these figures and today’s economic uncertainties, professional liquidity management is becoming increasingly important to ensure financial stability and flexibility.

In this article, you will learn what constitutes effective liquidity management and how businesses in Germany can gain transparency about their fiscal situation and maintain monetary flexibility.

What’s in this article?

• Liquidity management: What it is and why it matters
  
• How economic uncertainty affects liquidity in Germany
  
• Why is liquidity management so important for businesses?
  
• How do businesses get an overview of their liquidity?
  
• Emergency measures to increase liquidity in Germany
  
• Liquidity management challenges in Germany
  
• Digitalization as the key to successful liquidity management
  

Liquidity management: What it is and why it matters

Liquidity management refers to the systematic forecasting, monitoring, and control of cash flows. The aim is to coordinate income and expenditures so that sufficient funds are available at all times, thereby avoiding funding gaps. This oversight is a key component of financial management, covering both short- and long-term planning in the effective utilization of economic resources.

What is cash management?

Cash management is the operational aspect of liquidity oversight, encompassing the daily control of funds, including account administration, settlements, and short-term investments.

How economic uncertainty affects liquidity in Germany

Although the European Central Bank (ECB) is slowly lowering interest rates further, which will lower borrowing costs for businesses and encourage investment, politics continue to create economic uncertainty.

This has a major impact on the liquidity management of many organizations in Germany. High inflation, rising commodity prices, geopolitical tensions, and the ongoing effect of the coronavirus pandemic are making it more challenging for businesses to secure stable cash flows.

Rising energy and raw material prices have had a particularly significant impact on industrial and manufacturing operations. These price increases lead to higher production costs and put a strain on the profitability of many businesses.

Why is liquidity management so important for businesses?

In economically uncertain times, such as the current recession in Germany, liquidity management becomes increasingly important. According to the 2023 KfW SME panel, 32% of small and medium-sized enterprises reported funding gaps within the last 12 months.

Active liquidity management enables the identification of financial risks at an early stage and the implementation of robust countermeasures. It helps make strategic decisions about things such as investments, payment terms, or taking out loans. Smaller businesses with limited financial buffers especially benefit from forward-looking fiscal roadmapping.

How do businesses get an overview of their liquidity?

Businesses need a clear overview of their current and future cash resources. Effective liquidity management includes several key elements:

• Liquidity planning: A forecast of cash inflows and outflows, e.g., revenue from sales and expenses for salaries, rent, and suppliers
  
• Monitoring: Continuous monitoring of cash flows and balances to maintain solvency at all times
  
• Controlling: Analysis of plan-actual comparisons to identify risks and the need for action early
  
• Refinement: Active cash flow supervision, e.g., by using discounts, factoring, or extended payment terms
  
• Digital solutions: Using tools such as Stripe Payments to track settlement flows in real time and thus immediately identify potential bottlenecks
  

Proactive liquidity management

Enterprises have various tools at their disposal to implement the above-mentioned measures, such as:

• Liquidity ratios, e.g., liquidity levels I–III, to assess short-term solvency
  
• Cash flow statements that systematically record inflows and outflows
  
• Financial plans and models that simulate different scenarios and their impact on available funds
  
• Overdrafts and other short-term funding options to bridge gaps
  
• Treasury management systems (TMS) that enable the central control of payment flows and bank accounts
  

In Germany, in particular, many businesses rely on a combination of external tax offices and digital solutions to ensure efficiency and accuracy.

Advanced liquidity planning: Including long-term perspectives

Professional liquidity management must not only address short-term bottlenecks but also consider long-term perspectives. Businesses, therefore, need to plan their available funds over several years and review them on a regular basis. This includes, among other things:

Long-term financial planning

In many businesses, it is sensible to develop long-term financial plans that take planned investments and growth strategies into account. Well-thought-out planning can help avoid funding gaps before they arise and offer a clear direction for future development.

Crisis management strategies

It is becoming increasingly important for businesses to develop crisis playbooks. This is about safeguarding liquidity in times of crisis and being able to react quickly to unexpected market developments or external shocks. Such strategies include reducing expenditures, expanding financial buffers, and maintaining monetary flexibility.

Strategic financing plans

Selecting the right source of funding is paramount, especially in a challenging economic environment. Businesses must not only rely on banks or government funding programs but also consider alternative financing options, such as crowdfunding, angel investors, and private equity. These avenues might be of special interest when traditional funding routes are unavailable or too expensive.

Emergency measures to increase liquidity in Germany

In the event of an acute liquidity shortage, the following short-term measures can provide relief:

• Fast invoicing: Send invoices immediately to secure early receipt of settlement.
  
• Reduction of payment terms: Shorten the deadlines within which customers are expected to pay.
  
• Providing discounts: Present discounts for quick payment to accelerate cash flow.
  
• Negotiations with suppliers: Extend payment terms to preserve available funds.
  
• Factoring: Sell outstanding receivables to generate immediate liquidity.
  
• Short-term financing: Use bridging loans or overdraft facilities to cover temporary bottlenecks.
  

Additionally, various public programs are available in the country, such as the KfW funding programs, which support businesses during economically challenging times. Public-sector banks further offer industry-specific solutions.

Liquidity management challenges in Germany

German businesses face specific hurdles in liquidity management that often relate to local economic and legal conditions. Alongside the factors mentioned above, which likewise apply to many other countries, Germany faces some unique challenges.

Payment practices of business partners

It is not uncommon for payments from business partners to be delayed—the average payment period for business invoices in Germany was approximately 40.5 days in 2023. This complicates precise liquidity planning and necessitates active monitoring of outstanding receivables.

Complex tax structure

German tax law is complex, and businesses must continually track their obligations to ensure compliance. Advance settlements for corporate and trade levies, as well as value-added tax (VAT), can greatly impact available funds and need to be scheduled well in advance. Without proper coordination, bottlenecks can arise when large tax payments are due.

Lack of digitalization

Only about 40% of small and medium-sized enterprises in Germany use digital tools for liquidity management. This reluctance to embrace digitalization can severely limit the efficiency of financial forecasting, leading to many businesses failing to effectively monitor and manage their available funds.

Industry-specific fluctuations

In industries such as construction and events, there are seasonal fluctuations in revenue that make precise liquidity planning difficult. In these cases, it is important to plan and build up reserves for the less profitable periods of the year.

Access to financing

Young ventures and self-employed people, in particular, report increasing difficulties in obtaining loans from banks. Many struggle to secure external financing, which further complicates their liquidity planning. This is where Stripe Capital can help. With Capital, businesses gain quick, straightforward access to financing, which they repay in line with their sales.

Financing sources

Loans are certainly one of the most common channels of liquidity, but not the only one. Businesses in Germany also need to consider alternative financing sources that can facilitate access to capital:

• Factoring: Through factoring, a business sells its receivables to a third-party specialist. This delivers immediate liquidity by paying out most of the outstanding receivables instantly. In return, the external entity assumes the risk of payment defaults and dunning procedures.
  
• Supply chain financing: Another innovative model, this enables firms to pay suppliers more quickly while extending their settlement period.
  
• Venture debt: Venture debt is a valuable financing option, especially for growth-oriented businesses and startups. It is a loan provided in addition to equity capital.
  
• Funding programs and subsidies: Besides the private avenues mentioned above, numerous government funding programs are available to support businesses.
  

Digitalization as the key to successful liquidity management

Digitalization plays a central role in liquidity management, particularly in terms of enhancing efficiency and reducing costs. There are now numerous software solutions and online platforms that help businesses better monitor and steer their available funds.

Financial process automation

Automating tasks such as invoicing, dunning, and expense tracking considerably reduces the effort required for financial management. With Stripe Billing, recurring invoices can be created and debited automatically—including automatic reminders for outstanding payments, which significantly simplifies cash forecasting.

Real-time payment flow monitoring

With digital payment platforms such as Stripe, businesses can monitor their settlement flows in real time via a clear dashboard. This enables early response to funding bottlenecks and facilitates liquidity control.

Cash flow forecasts

Modern tools such as Stripe Sigma make it much easier to create cash flow forecasts. With the right software, businesses can view their current flows and estimate future remittances and revenues.

Fraud prevention and payment security

Tech-driven systems can further help reduce payment defaults. Stripe Radar uses machine learning to detect and block fraudulent transactions early on—a key aspect to ensuring stable liquidity.