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Februar 2012

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Liquidity – the one and only!

Written by , Posted in Allgemein

It is no coincidence that the first post is about liquidity. Liquidity is the ONLY measure that eCFOs need to focus on from Day One and should focus on for the entire life of any venture. All other considerations, from profitability, growth to balance sheet optimization are irrelevant if you run out of cash.

1st day measures

For a new venture or an eCFO joining a new company I would recommend the following steps for the first 3 months to become instantly familiar with the cash flow profile of your company:

1. The second you arrive make sure that all bills and invoices have to be signed by you and that you cover all cash out- and inflow channels

eTips: Don’t forget about online specific issues such as PayPal, Adwords & Adsense accounts, facebook ad accounts; linkbuilding accounts etc. Here you have a source of expenses and income that can come as quite a surprise.

2. Establish a spending limit – currently any expense that is above EUR50/USD40 should be approved by you – any you only. This lets you get an insight into the spending pattern of the company.

3. Check every transaction on your bank account daily. Don’t forget about credit cards and PayPal here. These accounts can hide a lot of different transactions and you only see a summary booking in the account – always make sure you go through an itemized list of all transactions.

 Medium-term steps

Once you have become familiar with the companies spending profile you need to establish a structure that allows you to make all other decision-makers aware of liquidity ups and downs. Your business will significantly improve if everyone is aware of what liquidity means and that “every little helps”! Make sure that people do not only focus on expenses but also on writing invoices and collecting cash as soon as possible.

In our companies we update our liquidity estimates once every week and plan ahead for a period of 8 weeks. Depending on the type of business you run this 2 months visibility will allow you to take short term measures to either postpone spending or increase cash collections if times get tough. After implementing a control like this for a period of more than 3 months you will become familiar with your liquidity ups and downs. In addition, sending this information to the entire leadership team ensures that even people who are either inexperienced or totally operationally focused gain an insight on how to control liquidity.

Long-term financing

A later topic of this post will be on financing options available to eCFOs. A period of weak liquidity will be unavoidable at one time or another but a sustained cash crunch can delay necessary investments and destroy all fun related to working in a start-up. It is your task to make sure that liquidity issues are solved eventually. This is done by putting in place a strong capital structure and by acquiring additional financing options as well as eventually making your company cash flow positive.

Furthermore we should discuss how you move your start-up from liquidity focused to profitability or growth focused once cash is no longer a problem. This sometimes can be a difficult switch since people who are focused on liquidity will often shy away from long-term investments – that said this is for a later discussion.

Sources of liquidity when times are tough:

We all have been there- it is the 25th of the month and you are not really sure how to make payroll?

  1. Delay payment – the only two parties that need to get their payment on time are your employees and the government. Employees are already risking a lot by working for a start-up and will generally have already agreed to lower direct compensation. Also remember, they HAVE to pay rent and you want to keep them in the company – so paying them is priority one. Secondly, the government does not care that you are a start-up. They will collect VAT and taxes no matter what – make sure you pay.  Everyone else outside of these two is optional – if you have been good about keeping payment deadlines your suppliers, landlords and even bankers will understand if payments are late occasionally – just don’t make it a habit.
  2. Friends and family – depending on the size of your business you can ask anyone and I literally mean anyone for a short-term loan to pay your payroll and taxes
  3. Your banker – most bankers have a small amount of leeway when it comes to overdraft facilities. If you have kept your banker in the loop about your business she will most likely be more supportive. Be sure to communicate clear and early when times are tough – the one thing bankers hate more than anything are surprises. If you know liquidity will be tough on the 25ths make sure you call on the 15th to alert your banker to the situation – ask for permission to use an overdraft and more often than not they will agree.
  4. Your clients – if you are in the fortunate position to already have clients, especially B2B clients, you can ask them for support. If they like your services, they will help you out by allowing up-front billing or speeding up payments.
  5. Your shareholders – if all else fails ask the owners to provide a short-term liquidity injection in form of a loan. Again this only helps if you are not the only shareholders and if other shareholders have additional liquidity reserves available.
  6. Your employees – this truly is a measure of last resort but you can always ask your employees if they can live with getting some of their salary with a delay – here you should especially focus on senior employees and management who might have some cash reserves and are not totally dependent on their full salary.

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Über den Autor


Nils Seebach

Nils Seebach ist Autor und überzeugter Blogger bei Digitalkaufmann.de. Er hat sich auf die betriebswirtschaftliche Analyse und Einschätzung von digitalen Geschäftsmodellen spezialisiert. Mehr Informationen über Ihn finden Sie hier.

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