- Business
Theory: corporate management and liquidity management
For those in a hurry: sufficient liquidity is essential for the company’s continued existence
- The main tasks of company management are setting goals, planning, deciding, implementing and controlling.
- In the company’s interest, genuine management decisions must not be delegated.
- Making sure that sufficient liquidity is available is one of the entrepreneur’s very own tasks, and one that should not be delegated either.
- It is the owner’s task to assign someone to secure liquidity – or to take on that responsibility themselves.
- The authority to monitor liquidity can be delegated, but responsibility for the company’s continued existence remains with the owner.
Corporate management in the narrower sense
Gutenberg – Erich, that is, not Johannes, the inventor of printing – so Erich Gutenberg is regarded as one of the fathers of modern business administration. To understand in theoretical terms where decisions are located in a company in general, let us therefore look at the operational value-creation process and thus at the factors of production, loosely following Gutenberg:
Factors of production are divided into
- dispositive factors
- elementary factors
The task of the dispositive factor is to lead, plan, organise and monitor the operational process. The essence of this factor lies in preparing and taking decisions. So there they are already: decisions. But aren’t decisions taken always and everywhere?
This factor can in turn be divided into the original factor and the derivative factor. The original component represents the actual management of the company, that is, running the business.
The decisions taken in this area are described as management decisions and have far-reaching effects on the company. According to Gutenberg, the features of such “genuine management decisions” are:
- Genuine management decisions are of great importance for the assets and earnings position and therefore for the company’s continued existence.
- Genuine management decisions are taken from the perspective of the company as a whole.
- Genuine management decisions cannot be delegated and, in the company’s interest, must not be delegated.
Let us remember this sentence: Genuine management decisions cannot be delegated and, in the company’s interest, must not be delegated.
At a later point in time, Heinz Wissenbach added to these features:
- Management decisions require “creative initiative” from every entrepreneur.
- Management decisions are characterised by the entrepreneurs bearing a special responsibility for them.
- Management decisions are decisions taken on the basis of imperfect information.
Starting from this characterisation, the following catalogue of management decisions can be drawn up (careful: copy & paste for the general section of a managing director’s job description):
- Defining company policy over the long term
- Coordinating the major operational divisions
- Removing disruptions in the ongoing operational process
- Securing continued existence through sufficient liquidity
- Business measures of exceptional operational significance and
- Filling the management positions in the company.
It can therefore be stated that the main tasks of company management are setting goals, planning, deciding, implementing and controlling.
Making sure that sufficient liquidity is available is therefore one of the entrepreneur’s very own tasks, and one that should not be delegated either.
But does an entrepreneur really have to take care of it personally? In small companies this question often does not arise for lack of employees. Otherwise, theory answers this question with the extended company management.
Extended company management
As a reminder: the dispositive factor can be further divided into the original factor, that is, the actual management of the company, and the derivative factor.
The derivative component is heavily dependent on company management. Its decision-making authority with regard to planning, organisation and control is limited by the instructions of the business management.
Of particular importance is that part of the operational process which deals with settling fundamental questions. For this purpose, let us look more closely at the term “corporate management”.
Corporate management in the broadest sense covers the areas of
- institutional and
- functional leadership.
Institutional leadership is aimed at shaping and distributing authority and specifies all the holders of tasks and functions. The distinction made in the organisational structure between top, middle and lower management therefore governs the room for manoeuvre of the individual decision-makers.
OK, and what does that mean in relation to liquidity? Let us take a small, owner-managed company with several employees. It is the owner’s task to assign someone to secure liquidity – or to take on that responsibility themselves. In companies with fewer than 10 employees, that is a frequently seen practice.
The main task of functional leadership lies in shaping and steering. Looking at these terms more closely, the functional level is divided into a task-related and a person-related aspect.
- In the person-related aspect, shaping and steering refer to people management. Here the attempt is made to motivate employees to strive for the goals set by company management. Shaping and steering in the task-related sense is understood as setting goals, planning, organising and controlling.
- The aspects of task-related, functional leadership are also grouped together under the term corporate management in the narrower sense.
So if the authority to monitor liquidity is delegated to an employee, then organising and controlling liquidity is that employee’s responsibility. Responsibility for the company’s continued existence remains with the owner, however. That is above all essential should the company become unable to pay.
A term often used in the same context is “management”. Corporate management and management are frequently equated, although the term management additionally carries connotations that are both positive and negative: a willingness to experiment, dynamism, flexibility of thought, ruthlessness (above all in personnel matters – “hire and fire”), openness and so on.
In this context, though, I have always preferred a different distinction between leadership and management. Leadership means “motivating employees to achieve goals”. Management is understood here as “assuming overall responsibility”. In small and medium-sized companies especially, these two terms are often united in one person or a few.
Topics covered in the theory series
Part 1: companies, goals and liquidity
Part 2: corporate management and liquidity management
Part 3: decisions and liquidity management