Liquidity Preservation
– simply explained

Key facts at a glance:

• Liquidity preservation ensures the company's ability to pay.

• Liquidity is a central prerequisite for operational business, the further development of the company, and the generation of income.

• A distinction is made between short-term and long-term liquidity preservation.

What Is the Purpose of Liquidity Preservation?

Liquidity preservation encompasses all measures a company takes to maintain or improve its ability to pay. Liquidity refers to the ability to repay all due liabilities in full at the agreed time. A company is therefore liquid when it has sufficient means of payment.

Ensuring this continuously is the task of financial controlling. Liquidity preservation is one of the central prerequisites for operational business, the further development of the company, and the generation of income.

The most important business management tool for continuously reviewing, ensuring, and managing solvency is liquidity and financial planning. In general, liquidity preservation is divided into two parts: a long-term and a short-term component.

Short-Term Liquidity Preservation

The short-term maintenance of liquidity is also referred to as situational liquidity preservation. This encompasses same-day liquidity planning and management, and thus the response to current developments.

Important tasks here include, for example, identifying and building liquidity reserves or accessing them. Such reserves can come from the company's cash holdings or bank balances, as well as from assets that can be sold at short notice.

Financial controlling must also be constantly aware of available funds for internal financing of the business. To this end, the company's payment flows must be continuously monitored. If bottlenecks in liquidity preservation become apparent, those responsible for finances must react and initiate the supply of debt capital or additional equity in a timely manner — for example through borrowing, issuing corporate bonds, or approaching investors. Here, situational and long-term liquidity preservation flow seamlessly into each other.

Long-Term Liquidity Preservation

The long-term assurance of liquidity is also called structural liquidity preservation. This involves planning finances in line with company development and business strategy.

One topic here, alongside the financeability of investments and growth, is also the optimal balance in the financial structure itself. A company should not be dependent on just one type of financing or one lender. Ideally, debt and equity as well as fixed assets and free funds should each be in a balanced relationship with one another.

Structural liquidity preservation also includes the continuous improvement of financing arrangements, the observance of deadlines, and the development of follow-up solutions. If, for example, a loan expires or a financing arrangement has become uneconomical for the company, topics such as loan refinancing, follow-up financing, debt restructuring, or new borrowing should be planned well in advance.