Why is cash flow so important? What does it all have to do with liquidity?  We would like to explain what it means and where the opportunities for improving the economic situation are for hoteliers if they keep an eye on this key figure.

  • Definition and meaning
  • Cash flow, liquidity and other important KPIs: the Quick Test
  • Hotel industry and cash flow
  • Improve this number!

Definition and meaning

The simplest explanation of cash flow is: determining where the money in the company came from and how it was used. Companies measure this for a specific period of time, usually the fiscal year.

In other words, this business figure indicates which financial resources/money generated by the company itself during the fiscal year are available to the company for financing investments, repaying debts and distributing profits.

There are several methods of calculating this. However, we would like to present here only the most common (practitioner) method.

cash flow definition


Here, this KPI is considered an indication of a company’s earning power and self-financing capacity. It also indicates financial flexibility and independence from investors/lenders. For example, a high number means that the company can manage in a tight situation without taking out loans.


By loading the video, you agree to YouTube’s privacy policy.
Learn more

Load video


Cash flow, liquidity and other important ratios: the Quick Test

Cash flow and liquidity are often confused or equated. Even though both have to do with flow of money, there is still a difference:
Cash flow is a comparison of cash inflows and outflows in a period (a flow parameter that measures changes over a period of time).
Liquidity represents the current availability of money/liquid assets. Accordingly, it is the ability of a company to meet its payment obligations to suppliers/debtors on time.
In order to be able to assess company situations quickly, financiers, analysts and bankers often use the so-called Quick Test.

This is a quick test with only four key figures, but still represents the economic situation of a company.
Four are selected from the wide range of ratios used in the analysis of annual financial statements:
– the equity ratio to assess capital strength
– the cash flow to assess financial performance
– the return on assets to assess the return on investment, and
– the debt repayment period for assessing the level of debt.

Using an evaluation scale, the ratios score between 1 (very good) and 5 (at risk of insolvency). like this, you can compare results in a meaningful way.

Cash flow in the hotel industry

Both, the financial sector and entrepreneurs often claim that cash flow is one of the most important indicators. Because then one would not have to worry about a financial emergency situation or even insolvency.
Of course, this also applies to the hotel industry.
In hotel valuations when selling one often uses the key figure cash flow very often in a specific procedure. Here, the discounted cash flow method allows investors to include, among other things, the impact of the cost of capital and the tax aspects in the valuation.
However, even without intentions to sell, it is important to look at cash flow. That’s because when it’s positive, a hotel’s cash increases, allowing it to pay down debt, reinvest in the business and have a buffer for challenging times. Today, those who did this before the Corona pandemic are doing well.
A negative cash flow, on the other hand, represents a deficit: no money was generated. In the long run, this will likely lead to a cash shortage.

Improve this number!

We have shown that it is important to keep an eye on this figure. And to improve it, if necessary. Here we would like to share some more suggestions on how to do that.

Take care of the revenue
– Active collection system: Claim all outstanding debts
– Try to replace any refunds with vouchers
– Rethink your marketing concept: for example, are there other partnerships/OTAs that will increase revenue
– Actively manage your room occupancy and room rates

Control / reduce your costs
– Review all costs: are there services/cooperation/services that you can suspended or minimized
– Plan and improve your use of goods and personnel
– Reduce inventories if they are excessive
– Payables to suppliers: Check all options/payment terms and take advantage of attractive supplier accounts

liquidity and KPIs