What is liquidity?

Liquidity means that a company always has enough money available to pay bills, wages, or other payments on time. A company is considered solvent if it can meet all its pending payments without any problems. This is essential to ensure economic stability.

Liquidity is often referred to as financial flexibility. It indicates how quickly a company can respond to financial demands. If sufficient available funds are present, unexpected costs can also be covered.

What payment methods count as liquidity?

The available resources that contribute to a company's solvency include:

Cash: Immediately available and usable everywhere.
Money in bank accounts: Balances in checking accounts or savings accounts that are instantly accessible.
Outstanding invoices that will be paid soon: These receivables are not yet in the account but will be available soon.
Securities that can be quickly sold: Stocks, bonds, or other financial products that can be converted into cash in the short term.

These payment methods are considered available because they can be accessed at any time or within a short period. It is especially important that these resources can be accessed without significant effort or loss.

What types of liquidity exist?

A company's solvency can vary. There is a distinction between short-term and long-term availability of financial resources. Both types are essential for maintaining a financial overview and ensuring constant solvency.

What is short-term liquidity?

Short-term solvency means that money is available immediately or within a short period. This includes:

Cash
Bank balances
Invoices that will be paid soon (receivables)
Stocks or other securities that can be sold quickly

This type of financial availability is essential for covering everyday expenses such as rent, salaries, or supplier invoices. Short-term liquidity is often considered within a period of up to one year.

What is long-term liquidity?

Long-term solvency involves assets that cannot be used immediately. These include:

Real estate
Machinery
Investments or long-term investments

These assets are often valuable but not immediately accessible. They are important for long-term stability, large investments, and financial security over extended periods. Long-term financial stability is usually considered over periods longer than one year.

How is liquidity measured?

A company's solvency is measured using specific indicators. These indicators show whether the company has enough money to pay its bills. The most important indicators are:

Liquidity Ratio 1 (Cash Liquidity): The ratio of cash and immediately available bank balances to short-term liabilities. This ratio is strict because only directly available money is considered.
Liquidity Ratio 2 (Receivables-based availability): In addition to cash and bank balances, this ratio also includes receivables. This is more realistic since incoming payments that will soon be received are also considered.
Liquidity Ratio 3 (Total availability): All short-term assets are included here, such as inventories. This ratio provides a broader overview of the company's solvency.

The higher these ratios are, the better the company's financial stability. Low values indicate that the company might have problems paying its bills.

What does liquidity mean in the context of debt collection?

In the field of debt collection, solvency is particularly important. If customers do not pay their invoices, the company lacks essential financial resources. This can lead to financial bottlenecks. Debt collection agencies help recover these unpaid invoices, allowing the company to regain access to the money it is owed.

How do outstanding receivables affect liquidity?

Outstanding receivables are invoices that have not been paid. They can significantly impact a company's solvency because the business relies on that money. Problems occur when:

Many customers fail to pay
Large amounts remain unpaid
Payments are delayed for a long time

The more unpaid invoices there are, the higher the risk of the company experiencing financial difficulties. It is especially dangerous if these receivables remain unpaid over the long term.

How can debt collection help secure liquidity?

Debt collection agencies help collect outstanding receivables. This improves financial flexibility because:

Invoices are paid more quickly
Financial bottlenecks are avoided
Automated processes speed up the recovery process

A well-organized debt collection system ensures that companies receive their money faster. This increases financial stability and reduces the risk of payment defaults.

How is liquidity reported on the balance sheet?

On the balance sheet, available financial resources are listed under current assets. These include:

Cash
Bank balances
Outstanding receivables
Securities that can be quickly sold

These items are important because they show how much money the company has available in the short term. Current assets are listed separately from long-term assets such as real estate or machinery.

On which balance sheet positions is liquidity displayed?

The balance sheet shows financial flexibility mainly under:

Cash: Available money
Bank: Balances in accounts
Receivables: Invoices that will be paid soon
Securities: Stocks or bonds that can be sold quickly

These items are particularly important when assessing a company's solvency.

When is a company considered liquid?

A company is considered solvent when it can pay its bills at any time. This means that enough money or readily available assets are present. If a company can meet its liabilities on time, it is financially stable and solvent.

Even a company with high-value assets can be illiquid if those assets cannot be converted into cash in the short term. Therefore, it is essential to always have enough short-term financial resources available.