How ERP helps to avoid
Liquidity Bottlenecks 5 Ways

Sufficient Liquidity

Ensuring sufficient liquidity is particularly important for SMEs. Good cash flow management plays an important role here. Modern cloud-based ERP systems offer special modules and other functions that optimally support this process.

Cash Flow Management: particularly relevant for SMEs

Cash flow management is even more important for SMEs than for large companies - due to lower financial leeway. In addition, start-ups and young companies in particular often have to readjust their strategy in the first few years. The business focus and target groups often change. Capital flows also fluctuate - sometimes considerably.

Modern ERP solutions offer many useful functions for managing your own liquidity. In the ERP system Dynamics 365 Business Central from Microsoft, for example, cash flow can be analyzed in the Finance and Operations module. In order to carry out reliable cash flow planning, all liquidity accounts in the company should first be determined. As a rule, these are accounts for cash or cash-like means of payment. In addition to statistics visual charts can also be generated to illustrate the forecasts. The software can also create future scenarios and make suggestions for better cash flow planning.

The ERP System makes Cash Flows clear

Because all ERP modules are seamlessly integrated and can therefore access a shared database, ERP software can display the entire cash flow in a coherent manner, allowing company processes to be better controlled and undesirable developments to be avoided. This is where the insight that only what can be measured can be meaningfully controlled comes into play. If, on the other hand, you do not know your own cash flows, you often react on instinct in the event of liquidity bottlenecks. For example, decisions are then made prematurely based on seasonal fluctuations or short-term slumps in sales. As a result, cuts may be made at the wrong end. On the other hand, a constantly large cash surplus is not always ideal either; it may indicate a lack of investment.

Long-term successful companies usually have one thing in common: they are able to understand their cash flow more deeply and adjust it more finely. The advantage of cash flow as a measurement criterion is that it is not so easy to manipulate, unlike profits and sales.

1. Better Liquidity through better Prices

If higher prices can be achieved, this often has a positive effect on liquidity and profits. However, in the absence of data on cash flows, it becomes difficult to find the right price. As a result, the company’s own products and services are sometimes sold too cheaply. In other cases, a reduced price would perhaps ensure more sales volume and bring in more profit at the end of the day. However, if the cash flows for products and services are known, they can provide the best possible support for such decisions. Because more revenue is generated through optimized prices, liquidity also improves. A detailed cash flow can be used to identify products that generate profit through volume. Their sales can then be promoted in a targeted manner.

In addition, the development of the cash flow can be constantly monitored. Cash flows change over time: old ones trickle away, existing ones grow, new ones emerge. As a rough guide, it can be useful to analyze the cash flow in detail on a monthly basis - or more frequently if necessary. In this way, favorable and unfavorable trends can be discovered early on. As sales from the core business and businesses in its immediate vicinity generate the most and most sustainable cash flow, they should be closely monitored.

2. Cut Expenditure quickly and sensibly

If financial resources are tight, cutting expenditure is an obvious choice. It can be effective and deliver quick results. However, there is also the danger of cutting at the wrong end - investments that seem superfluous may turn out to be important later on. For other expenses, it makes more sense to reduce them for the time being and not to stop them abruptly. In yet other cases, certain investments appear to be necessary at first glance, but are dispensable from a long-term perspective.

Reduce Expenditure without jeopardizing Customer Relationships

For example, in the event of an unfavorable business development, the decision is often made to cut back on customer service. However, without taking into account the fact that this may also offend long-standing and highly profitable customers. Or you only pay attention to the price and buy upstream products of lower quality. However, this can be expensive in the long term if the quality of your own products falls as a result and loyal customers are lost. The marketing insight that on average more effort is needed to win new customers than to sell to existing ones seems to describe the situation well here. However, if you know the individual cash flows of individual customers, you can treat them in a more differentiated way.

3. Detect late Payments more quickly

Not uncommon in everyday business life: even if invoices are sent out quickly, the amounts are not always in the account on time. The liquidity then suffers. However, if the relevant data is available, even notoriously defaulting customers can be identified quickly. Transactions that are not significant individually but add up to large amounts in the long term can also be identified more quickly.

Cash Flow Management: securing Customer Loyalty

Timely data on incoming payments also helps to treat customers in a more differentiated manner with regard to their payment behavior. Not every customer intentionally misses the payment deadline. Sometimes there are good reasons for this or they have simply forgotten. If this is immediately followed by an unfriendly reminder, this can cause lasting damage to the customer relationship. If customer-specific cash flow data is available, you can see their payment history. Those who are late for the first time or only rarely can then be reminded in a friendly manner. An ERP system can also be used to automate many processes, including the sending of invoices. This saves time.

In other cases, it may make sense to use an external service, such as a reputable factoring provider. The advantage: liquidity is then available more quickly. However, whether such services make sense also depends heavily on the type of customer relationship - they are more suitable for many customers who receive highly standardized services than for a highly individualized collaboration.

4. Free up Liquidity in the Warehouse

In companies that produce or trade, a lot of money is often tied up in the warehouse. The amounts stuck here can usually be invested more profitably elsewhere. The fundamental aim of warehousing should be to maintain a balance, i.e. to ensure that as few items as possible remain in stock for as short a time as necessary. On the other hand, to prevent expensive special procurements and delivery failures because the required parts and goods are not in stock. A detailed cash flow overview can help here.

ERP Software: optimal Cash Flow Management in the Warehouse

Based on a cash flow and warehouse data analysis, it is then possible to determine whether it is worth keeping higher quantities of certain fast-moving items in stock. Or it can also be used to determine the minimum quantity of medium and slow-moving items that should always be in stock. If you also discover that a large quantity of slow-moving goods has accumulated, cash flow data can support further action. For example, when deciding whether it is worth offering the goods at a discount in order to improve the cash flow in the short term, an overview of cash flows using an ERP system can also be helpful here. The fact that relevant ERP modules can be used to access data from the warehouse and goods management is a further advantage: this means that the information required for analysis and planning is available in a database. It can be provided quickly and comprehensively by other modules - e.g. those for accounting, finance and operations. Under- and overcapacities in the warehouse due to missing or incorrect data are then a thing of the past. In addition, many modern ERP systems now offer AI tools, which further improve the results.

Another point: if deliveries are only partially complete on the way to dispatch, the data from the ERP system can be used to quickly determine what is still missing. The suppliers can then be identified and the causes clarified with them. Customers can then also be informed promptly that the delivery may be delayed.

5. Cash Flow Analysis: driving Growth with Care

Start-ups and young companies in particular try to grow as quickly as possible. Company growth is undoubtedly important, but it should be done carefully. An aggressive and ill-conceived strategy can do more harm than good.

Liquidity & Growth: Internet Advertising and traditional Sales

Internet advertising is an example of this. This can often quickly make your own products and services better known and increase sales. However, after initial success, companies are sometimes tempted to increase their advertising budget several times over in the short term. They then invest in the hope that sales will increase accordingly. There is a risk here of losing money and possibly even getting into financial difficulties. Profits from advertising usually reach a plateau after a growth period and then level off. If you proceed carefully, you will avoid unpleasant surprises.

The cost-benefit ratio for traditional on-site acquisition can also be negative under certain circumstances. There is a risk of spending too much on customers who have too little lifetime value from the outset due to their needs. In addition, there are almost always hidden costs in conventional sales that are not sufficiently taken into account: office space and equipment, cell phone costs, training for employees with unclear added value, etc.

ERP & Cash Flow Management: controlling Expenses in the best possible Way

But expenditure can also quickly get out of hand in other company operations. This involves investments that may not be absolutely necessary or are made prematurely, such as a larger office with luxury furniture, new expensive notebooks and other IT equipment. In the right circumstances, these and other expenses may of course be appropriate, but only after sufficient liquidity has been secured for the long term. It is therefore important that such decisions are made in close coordination with cash flow development. Here, in turn, ERP software can be very useful to overview and analyze cash flows from different departments and from different customers.