Systematic Liquidity Management for Mechanical Engineering SMEs: Navigating Long Project Cycles
Why Liquidity Management is Critical for Mechanical Engineering SMEs
Answer in one sentence: Mechanical engineering companies face above-average liquidity risk due to long production cycles and project-based payment structures.
The Special Challenges of Mechanical Engineering Companies
The mechanical engineering industry faces unique cash-flow challenges that other industries do not encounter to this intensity. 82% of all company bankruptcies are caused by poor cash-flow management – a statistic especially threatening for manufacturing companies.
Mechanical engineering companies struggle with the following specific problems:
- Extended production cycles: Investments in materials and workforce are made weeks or months before revenue is realized, leading to critical liquidity gaps
• Project-based payment structures: Milestone payments create unpredictable revenue cycles that are hard to plan
• High upfront costs: Mechanical engineering requires substantial capital tied up in raw materials, semi-finished goods and specialized labor
• Unexpected cost leaps: Machine breakdowns, quality problems and supply-chain disruptions unplanned burden liquidity
“Over 60% of SMEs struggle with liquidity gaps caused by late payments, seasonal fluctuations or unexpected expenses,” confirms a recent INNOPAY study. For mechanical engineers this issue is exacerbated by the complexity of their value chains.
Costs of Poor Liquidity Planning
The consequences of poor liquidity planning hit mechanical engineering companies particularly hard:
- Operational insolvency: Salaries and supplier invoices can no longer be paid on time
• Loss of early-payment discounts and rebates: Important cost advantages through early payment are lost when liquidity is tight
• Deterioration of supplier relationships: Payment delays jeopardize established partnerships and supply chains
• Missed growth opportunities: Attractive contracts must be rejected because pre-financing is missing
• Insolvency risk: Lack of liquidity leads to business closure more often than actual unprofitability
A typical scenario: A mid-sized mechanical engineering firm receives a major order of €2 million. Production requires material and personnel costs of €1.4 million over six months before the first milestone payment is made. Without systematic liquidity planning, success quickly turns into an existential crisis.
The Fundamentals of Systematic Liquidity Management
Systematic liquidity management starts with understanding the cash-conversion cycle and continuously monitoring critical key figures.
Understanding Cash-Flow Cycles in Mechanical Engineering
The cash-conversion cycle in mechanical engineering differs fundamentally from other industries due to its complexity and length:
Typical mechanical engineering cash-flow cycle:
- Raw material procurement (Day 0-30): Purchase of materials with 30-60 day payment terms (increasingly longer)
- Production (Day 30-150): Personnel costs, energy costs, machine depreciation accrue continuously
- Completion (Day 150-180): Quality check, final assembly, internal logistics costs
- Invoicing (Day 180-210): Administrative handling, documentation, shipping
- Payment receipt (Day 240-300): Customer payments often occur 30-90 days after delivery
These 240-300 days between material purchase and payment receipt require precise working-capital planning. Without systematic monitoring, critical financing gaps emerge.
Key Metrics for Liquidity Control
Successful liquidity control is based on five decisive KPIs:
• Cash-Conversion Cycle: Measures the days between investment and payment receipt (target value for mechanical engineering: 180-240 days)
• Working Capital Ratio: Ratio of current assets to current liabilities (target: 1.5-2.0)
• Current Ratio: Liquidity of the first degree for short-term payment capability (minimum value: 1.2)
• Days Payable Outstanding: Average payment time to suppliers (optimum: 45-60 days)
• Inventory Turnover: Frequency of inventory turnover as an indicator of capital tie-up (industry average: 4-6 times annually)
Difference Between Liquidity and Profitability
A profitable company can still fall into a liquidity crisis – a phenomenon that occurs particularly often in mechanical engineering. The reason: timing is more decisive than profit margins.
Critical distinction:
- Profitability shows whether a company generates profits in the long term
- Liquidity determines whether it remains able to pay in the short term
A mechanical engineering company can have highly profitable contracts yet still fail if cash-inflows are not synchronized with expenditures. Liquidity shortfall leads to business failure more often than actual losses.
Practically Tested Tools and Templates for Liquidity Forecasting
Excel-based forecasting templates provide SMEs with a cost-efficient basis for professional liquidity planning with scenario functionality.
Excel-Based Forecasting Templates for SMEs
8-step process to create a liquidity forecast:
- Define basic structure: 13-week planning horizon with weekly detail
- Record opening balance: Current bank balances and available credit lines
- Project revenues: Milestone payments according to project progress and contract terms
- Categorize expenses: Personnel costs, material costs, operating costs, investments
- Develop scenarios: Best-case, realistic case, worst-case for critical positions
- culate contingency buffers: Liquidity reserves for unpredictable events
- Define trigger points: Automatic alerts at critical liquidity levels
- Establish update rhythm: Weekly actual-data integration and forecast adjustment
Essential template components:
• Rolling 13-week forecast with daily liquidity view
• Project-based revenue categorization by probability and timing
• Automated scenario calculations for different payment assumptions
• Graphical liquidity curve with critical warning thresholds
Professional Liquidity Software: Evaluation and Selection
For growing mechanical engineering companies, specialized software solutions offer extended functionalities:
Commitly (from €45/month with annual payment): Focus on cash-flow forecasting with direct bank integration and automatic categorizations. Particularly suitable for project-based companies.
Tidely (from €45/month with annual payment): German solution with strong focus on SME needs, offering liquidity planning with scenario management and early warning system.
Finban (price on request): Enterprise solution with comprehensive treasury functions, ideal for larger mechanical engineers with complex group structures.
Evaluation criteria for software selection:
• Integration with existing ERP software (SAP, Microsoft Dynamics)
• Automated data imports from accounting and banking
• Project-based liquidity planning with milestone tracking
• German compliance and GDPR conformity
• Scalability for growing companies
Integration with Existing Systems
Successful integration requires a systematic approach:
- ERP-connection: Automatic import of receivables data, payables data and project information
• Banking integration: Real-time account balances and transaction data via PSD2 interfaces
• CRM linkage: Sales-pipeline data for realistic revenue forecasts
• Controlling dashboard: Central overview of all liquidity-relevant KPIs
The integration reduces manual effort by up to 70% and significantly improves forecasting quality through real-time data.
Monitoring Strategies for Project-Based Payment Structures
Answer in one sentence: Daily liquidity monitoring with automated early-warning indicators is indispensable for project-based payment structures.
Implementing Daily Liquidity Monitoring
5-step routine for daily monitoring:
- Morning cash check (08:00): Review all bank accounts and available credit lines
- Incoming-invoice check (09:00): Monitor expected customer payments and deviations
- Outgoing-invoice planning (10:00): Due supplier payments and priority setting
- Forecast update (11:00): Integration of new information into the 13-week forecast
- Exception reporting (12:00): Report critical deviations to management
Early-warning indicators for critical situations:
• Liquidity falls below the equivalent of 2 weeks of expenses
• Receivables defaults exceed 5% of open items
• Customer payment terms extend by more than 14 days
• Payables periods climb above 60 days
Milestone-Payment Management
Structured milestone management significantly reduces payment risks:
- lear milestone definition: objectively measurable progress criteria with defined acceptance criteria
• Proactive communication: align with the customer 14 days prior to milestone achievement
• Documentation and evidence: complete proof gathering for quick invoicing
• Escalation procedures: defined steps in case of delays or disputes
Optimal milestone structure for mechanical engineering:
- 30% advance payment on contract award
- 40% at 50% completion
- 20% at acceptance/delivery
- 10% after 30-60 days warranty
Supplier and Payables Management
Strategic supplier payments can improve liquidity by 10-15%:
- Payment-term optimization: Negotiate 45-60 day payment terms without harming relationships
• Discount calculation: Systematic evaluation of early payment discounts vs. liquidity costs
• Supplier financing: Supply-chain-finance programmes for win-win situations
• Partnership approach: Transparent communication during temporary liquidity bottlenecks
The best results are achieved by companies that build trusting, long-term supplier relationships which also allow flexibility in difficult phases.
Risk Management and Scenario Planning
Answer in one sentence: Systematic scenario planning with defined trigger points enables proactive action before liquidity crises.
Preparing Worst-Case Scenarios
Four critical crisis scenarios for mechanical engineering firms:
Scenario 1: Major customer payment default
- Effect: 20-30% of receivables are lost
- Trigger: Customer declares insolvency or pays 90+ days late
- Measures: Activate credit insurance, consider factoring, initiate emergency financing
Scenario 2: Critical machine breakdown
- Effect: Production stoppage for 2-4 weeks
- Trigger: Main production facility fails, spare parts not immediately available
- Measures: Organize leased machines, deploy subcontractors, renegotiate delivery dates
Scenario 3: Supply-chain disruption
- Effect: Production delay of 4-8 weeks
- Trigger: Key supplier fails, critical components not available
- Measures: Activate alternative suppliers, increase inventory, intensify customer communication
Scenario 4: Economic downturn
- Effect: 30-50% loss of orders over 6-12 months
- Trigger: Market slump in main target sector
- Measures: Adjust cost structure, open new markets, apply for short-time work
Dimensioning the Liquidity Buffer Correctly
Calculation of the optimal liquidity buffer:
Mechanical-engineering SMEs should calculate their liquidity reserves according to the following formula:
· Base buffer: 2 months’ expenses (minimum requirement)
· Project-risk surcharge: +0.5 months’ expenses per large project > €500k
· Seasonality surcharge: +1 month’s expenses for > 30% seasonal fluctuations
· Industry-risk surcharge: +0.5 months’ expenses in volatile target markets
Example calculation for a mechanical engineering firm:
- Monthly fixed costs: €400,000
- Two large projects: +€400,000 (2 × 0.5 months)
- Seasonal fluctuations: +€400,000
- Optimal buffer: €1,200,000 (3 months’ expenses)
Setting Up an Early-Warning System
Automated trigger points for proactive action:
Liquidity triggers:
• Yellow: Liquidity falls below equivalent of 6 weeks of expenses → activate payment prioritisation
• Orange: Liquidity falls below equivalent of 4 weeks of expenses → extend credit lines
• Red: Liquidity falls below equivalent of 2 weeks of expenses → initiate emergency financing
Operational triggers:
• Receivables ageing exceeds 90 days → intensified debtor management
• Payment defaults exceed 3% → review credit insurance
• Project milestone delays > 14 days → escalate to customer
FAQ – Frequently Asked Questions on Liquidity Management
What is the optimal liquidity buffer for mechanical engineering SMEs?
Mechanical engineering companies should hold 2–3 months’ expenses as a base liquidity buffer. With longer project cycles or volatile markets, 3–4 months’ expenses may be required. The exact amount depends on project size, customer creditworthiness and seasonality.
How often should the liquidity forecast be updated?
Project-based mechanical engineering companies should update their 13-week forecast weekly and monitor their current liquidity daily. In critical phases or large projects, daily forecast adjustment may be required.
Which warning signals indicate liquidity problems?
Critical warning signals are: supplier payment delays over 60 days, increasing receivables ageing over 90 days, cash balances falling despite profitability, frequent utilisation of credit lines over 80%, and project-milestone delays over 14 days.
How can I minimise payment delays from customers?
Implement clear milestone payments with 30% advance payment, automated invoicing within 5 days, early‐payment discounts of 2–3%, systematic dunning from day 7, and binding acceptance protocols for large customers to enable rapid invoicing.
What to do in an acute liquidity crisis?
Immediate measures: fully utilise available credit lines, negotiate payment deferrals with strategic suppliers, sell short-term receivables via factoring, stop all non-critical expenditures, and engage professional restructuring consulting.
Which software is suitable for SME liquidity planning?
For smaller SMEs (up to approx. 200 employees) Excel templates with manual maintenance are suitable. Mid-sized companies benefit from Tidely or Commitly with automated imports. Larger mechanical engineering firms should prefer integrated ERP solutions with treasury modules.
How do I correctly calculate the Cash-Conversion Cycle?
CCC = Days Sales Outstanding + Days Inventory Outstanding – Days Payable Outstanding. For mechanical engineering a typical value: 45 days receivables + 120 days inventory – 45 days payables = 120 days cash-conversion cycle.
When should I engage external liquidity advisory?
External consulting is appropriate when: recurring liquidity bottlenecks despite profitability, company growth over 50% annually, complex project financing over €5 million, impending company sale, or when internal resources for systematic monitoring are lacking.
Sources & Facts
[S1] U.S. Bank Study by Jessie Hagen – Why Small Businesses Fail and How to Succeed in First Year (2016). https://cocountant.com/blog/growing-a-business/why-small-businesses-fail-and-how-to-succeed-in-first-year/
[S2] INNOPAY – Bridging the Cash Flow Gap: How SMEs Can Overcome Liquidity Challenges (2024). https://www.innopay.com/en/publications/bridging-cash-flow-gap-how-smes-can-overcome-liquidity-challenges
[S3] Irwin Insolvency – How Many Businesses Fail Due to Cash Flow Problems (2023). https://www.irwin-insolvency.co.uk/how-many-businesses-fail-due-to-cash-flow-problems/
[S4] Ascend Bank – 10 Strategies for Effective Cash Flow Management for Manufacturing Businesses (2024). https://ascend.bank/news/10-strategies-for-effective-cash-flow-management-for-manufacturing-businesses/
[S5] HighRadius – Cash Flow in Manufacturing Business (2024). https://www.highradius.com/resources/Blog/cash-flow-in-manufacturing-business/
[S6] Tidely – Liquidity Software Comparison (2024). https://www.tidely.com/en/blog-posts/liquidity-software-comparison
[S7] Score – The #1 Reason Small Businesses Fail and How to Avoid It (2023). https://www.score.org/resource/blog-post/1-reason-small-businesses-fail-and-how-avoid-it
Copyright © 2025 Peter Littau
Copyright © 2025 Peter Littau
