Creating liquid funds for your company is certainly one of the most important goals of an entrepreneur. Because with sufficient liquid funds, a company can, for example, borrow more easily. Finally, large amounts of liquid funds promote the creditworthiness of a company. There are many ways to optimize this. For example, you can extend the payment terms for incoming invoices. Furthermore, you can shorten these deadlines for your own customers. Or you switch to factoring right away, so that the money is immediately available. This will create more liquidity in the short term. A little longer term is the option to create liquidity by selling operational real estate or other operational assets. Of course you have to rent them back.

€ 20 million Profit tax-free from GmbH & Co. KG

1. What are liquid assets?

Liquid funds are, of course, assets that are available in a simple and therefore fast way to be considered as means of payment. This also includes assets that are not themselves a means of payment, but can be converted into such within a short time. So money plays a crucial role here. It does not matter whether one considers cash, for example in cash, bank balances or checks. However, quickly selling securities or bills of exchange as well as deposits in cryptocurrencies or precious metal holdings can also come into question as liquid funds. It depends a lot on the time within which the money should be available. Therefore, for longer periods, even other items of a company’s working capital can be considered as medium-term available cash, such as commodities, or raw materials, consumables and consumables.

2. ways to raise liquid funds

If a company now needs liquid funds, one asks for the period within which a certain amount of money should be available.

2.1. Short-term procurement of liquidity

If only a few days are available, then you can basically only consider the immediately available cash stocks as well as the bank balance. However, one can also convert securities or gold as well as other noble metals that a company may have at its disposal into money quite quickly. The same applies to Bitcoins and other cryptocurrencies. However, it should be noted that this also makes a tax treatment of the proceeds possible.

2.2 Medium-term procurement of liquid assets

However, if the increase in liquidity is only in the near future, other options will be added to raise liquid funds. This can be done in two ways. On the one hand, you can ask your own suppliers to grant an extended payment term. This also provides an increase in liquidity in the short term, but only for the period covered by the extension of the payment date.

The same applies to the second option. Here you shorten the payment term of your own customers. As a result, the agreed fee for own deliveries and services is available correspondingly faster.

However, these liquid funds are available even faster if factoring is also implemented. Because this gives you the remuneration even practically immediately, because you basically sell the claim to your own customers to the factoring service provider for a small fee.

Furthermore, it may be possible to consider receiving liquid funds through public funding. Of course, this is usually associated with special conditions. For example, loans from the Kreditanstalt für Wiederaufbau (KfW) come into consideration.

A little more complex, thus also more time-intensive, is the sale of objects of the company's fixed assets. However, it should also be ensured that you can rent the sold economic goods back. After all, they should continue to serve the company. However, the sale of the assets also leads to an increase in the stock of liquid funds. In particular, the sale of operational real estate can achieve a significant increase in liquidity.

To show how high the raising of additional liquid funds can be, we are examining various options using an example. In doing so, we want to make less use of assets that have little connection to the operation of a company. This means, for example, that there are no opportunities for converting securities, cryptocurrencies and gold holdings into liquid funds. Rather, in our example, we want to turn assets into liquid funds that are present in most companies. So because we focus on those opportunities that have an operational connection, our example becomes more universal.

In order to make the example as realistic as possible, we want to set a goal and some relevant parameters for the company. As a target, we want to achieve liquid funds of up to EUR 12,000,000. In our example, we note an annual turnover of EUR 20,000,000. With an annual turnover of this amount, we can expect an annual profit of EUR 1,000,000 by means of a realistic return on sales of 5%. In addition, there should be a real estate in the fixed assets that represents a share of EUR 2.000.000 in the operating assets.

3.1. Raising liquid funds: extension of the payment term for liabilities

With an annual turnover of EUR 20,000,000 and a profit of EUR 1,000,000, we have to expect expenditures of EUR 19,000,000. Let’s now assume that we had previously agreed with our suppliers a maturity of their invoices within a few days. If, through negotiation, we manage to extend this period of time available to us to pay our liabilities to three months, then within this time difference we can accumulate an amount of cash equivalent to about a quarter of the annual amount. Thus, within this period, at least EUR 4.750,000 will be added as liquid funds in our portfolio.

3.2 Raising liquidity: shortening the payment term for claims

We now want to achieve the same principle in the opposite direction in our negotiations with our customers. We assume that our customers have been able to pay within three months so far. Now we are pursuing a new payment term that secures payment by our customers within a few days. In fact, the negotiations have been successful, with an accumulation of liquidity of about EUR 5 million over a three-month period.

However, if the negotiations fail, a second option can still be used. Because if we transfer our claims to our clients to a service provider via factoring, then we have also accumulated liquid funds in this amount within three months. In doing so, we expect the cost of factoring to be between 1% and 2%, resulting in a negligible amount of a maximum of EUR 100,000 for a value of claims of EUR 5,000,000 within this period. So we increase our liquid assets by at least another EUR 4,900,000.

3.3 Raising liquid funds: sale of an operational property

3.3.1. Increase in liquidity by EUR 2.000.000

So far, we have collected just under EUR 10,000,000 in liquid assets without having accessed the operating assets. To achieve our goal, we now want to sell the operating property, which corresponds to a value of EUR 2.000.000. In fact, we find a buyer who both buys us the property for this price and is willing to rent it to us afterwards.

In this way, we are actually able to generate liquid funds totalling just under EUR 12,000,000 over a quarter-year period.

3.3.2 Link with design models to avoid inheritance tax and gift tax

If we do it very skillfully, then the buyer of the property is also a person outside the closest family circle, but who comes into consideration as an heir. Because by selling, we avoid that this person, for example a niece or nephew, will one day have to pay gift tax or inheritance tax to a significant extent on this property. However, the prerequisite is of course that this person is able to transfer the purchase price to the company’s bank account.

The advantage is that, on the one hand, the small allowances that would be applicable in this case can be ignored and, on the other hand, a depreciation of 3 % can be made when the rental income is taxed with the purchase and subsequent rental of the business property. In this way, the potential heirs receive the purchase price back within about 33 years by savings on income tax. The acceptance of the real estate transfer tax must of course be included. However, the maximum tax rate of 6 % here is significantly lower than the rate applied to inheritance tax and gift tax.

3.3.3. Formation of a tax-free reserve according to § 6b EStG

Furthermore, it is possible for a corporation to make the sale of the property tax-free. For this purpose, a reserve is created equal to the profit generated by the sale of the land. However, this only applies if the conditions of § 6b EStG are met. This requires the company to acquire a new property within the next few years. This can be done either by buying or by building a new building. It is only important that this takes place within a certain period and the acquisition of a corresponding asset takes place. In any case, the reserve is finally dissolved.

€ 5 million Transfer real estate & money without gift tax

Tax transfers.

4. What the accumulation of liquid funds may serve

A question about our consideration of increasing liquidity in companies has so far gone unnoticed. In fact, it should be at the very beginning. Because why should one accumulate liquid funds, often within a relatively short time? After all, most of the measures discussed have a short-term effect at best. Because on the one hand, the company must transfer the short-term delayed payments to the creditors soon. On the other hand, some of the measures are even costly.

4.1 Accumulation of liquid funds to increase creditworthiness

One advantage of accumulating liquid funds in the company is related to raising further liquid funds. Because if you plan to take out a loan, then a high stock of liquid funds may promote the credit rating of the company. After all, this is an evaluation criterion that many banks look very favourably on when negotiating the granting of a loan.

4.2 Provision of liquid funds for the use of special conditions when acquiring

In addition, it may happen that a company wants to acquire assets for which there are particularly favorable conditions in the short term. Here we are thinking in particular of the purchase of larger quantities of goods that are storable. If they then also experience an enormous increase in value within a short time, then this approach is doubly attractive. In the commodity market in particular, one may benefit from the accumulation of liquid funds.

4.3 Increase in liquidity for profit distribution

Another way to use liquid funds is to pay out hidden reserves contained in the company as a profit to the entrepreneurs involved in it. There are even ways that allow a tax-free payment. But this requires a separate design model.