Cash flow challenges: How to manage liquidity in an economic downturn
Companies that actively manage their cash flow lay the foundation for resilience rather than collapse. Often, the greatest threat to a business is not profitability but a lack of liquidity. The Ecovis consultants explain why.
Even successful companies are at risk of falling into crisis if revenues decline while expenses remain constant. A cautionary example is the German fashion brand Golfino AG, which had to file for insolvency after a drop in revenue of EUR 5 million and the withdrawal of bank support. Despite having 200 employees, 40 stores and an international presence, the company simply lacked liquidity.
To avoid such risks, systematic monitoring is essential. Metrics such as current ratio (≥1.5), quick ratio (≥1.0), accounts receivable turnover (>10 per year) and inventory turnover (>4 per year) provide early warning signs. In addition, companies should conduct stress tests in which revenues drop by 20 to 50 percent over three to six months. This allows weaknesses to be identified before a crisis occurs.
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Pingwen Hu, Senior Partner and Certified Public Accountant, ECOVIS Ruide Certified Public Accountants Co., Ltd, Shanghai, China
What companies can do to optimise cash flow
Optimising cash flow requires active management of inflows and outflows. On the revenue side, early payment discounts, dynamic credit limits, or prepayment for high-risk customers can help, as can automatic price reductions for slow-moving products or consignment models with suppliers.
On the expenses side, payments should be prioritised: essential costs such as wages, taxes, and key suppliers first, negotiable expenses such as advertising later, and nonessential items such as travel or consulting not at all. Extended payment terms, local sourcing, and leasing instead of purchasing also help preserve liquidity.
A contingency plan is recommended for emergencies, including maximum credit lines, additional overdraft facilities, credit insurance for receivables, and building reserves equal to at least three months of fixed costs.
Economic downturns expose weaknesses but also strengthen discipline. Companies that consistently monitor liquidity, incorporate stress tests, manage inflows and outflows, and build buffers not only secure their survival but can emerge from a crisis stronger.
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