What is a liquidity plan , what is a liquidity plan? Comprehensive liquidity planning is required in all seriously managed companies. This has a special status in companies that are just being founded. Company founders have to create a business plan for banks and financiers , the liquidity plan is part of this business plan .
Time factor in the focus of the liquidity plan
As an entrepreneur, you need to have sufficient capital available at all times . Due liabilities must be paid on time in order to remain competitive at all and not to endanger the company’s existence. When creating your liquidity planning, it is important that you do not put the income or expenses in the foreground, but pay close attention to the times when payments have to be made or when payments are due. How detailed such a liquidity plan needs to be also depends on what type of company you have. For you as a small business owner or as a freelancer, you should create a liquidity plan, you should plan for at least one year into the future .
Objective of liquidity planning
According to topbbacolleges, the aim of liquidity planning is to determine the expected level of liquid funds . The liquidity plan is an important controlling instrument for the timely assessment of risks. In liquidity planning, all expected incoming payments are recorded within a planning period; the focus is on the company’s solvency .
When financial difficulties are identified, a company can take appropriate action. For example, products that do not make a profit can be removed from the range or loss-making lines can be closed. Debt capital in the form of loans can also be taken out if sufficient liquidity is no longer guaranteed. In addition, outstanding debts can be demanded more emphatically or assigned via factoring . In this way, the liquidity can be increased again.
Structure of the liquidity plan
When planning your liquidity, you should always record the initial level of your liquid funds at the beginning . This means that you really do determine all cash and bank balances. In the next step you have to create a list that shows the income and expenses of a period. These first two steps will give you the final balance of your cash and cash equivalents. A period can go from one day to one year. As a small business owner or freelancer, you should choose a period of one month .
The schematic structure of a liquidity plan
There is always a typical schematic structure for a liquidity plan . It looks like this.
| Opening balance of all cash and cash equivalents from the bank and cash register | |
| + | all payments made within a period, such as outgoing invoices |
| = | available funds |
| – | all payments that occur within a period (e.g. salaries, rents, loans, etc.) |
| = | cumulative liquidity |
Positions for the preparation of the liquidity plan
The positions in your liquidity plan result from deposits (cash inflows) and disbursements (cash outflows) . We show exactly what these are in the following list.
| Deposits | |
| Cash on hand and cash on hand | all cash balances in your till |
| Estimated receipt of payments |
– Payments from sales – VAT payments |
| Other payments | – Asset disposals – Borrowings – Interest payments – Tax refunds and other reimbursements – Private deposits (this only applies to sole proprietorships) |
| Payouts | |
| Purchase of goods | all outflows through the purchase of goods |
| Personnel costs, social security contributions, special payments |
|
| Long-term contracts | – e.g. subscriptions |
| Other operational payments | – repayment of loans – rent payments – leasing installments – motor vehicles – purchases of equipment – costs for advertising – costs for telecommunications – input tax – consulting costs – travel costs – costs for further training – costs for repairs – private withdrawals from sole proprietorships |
Example: detailed liquidity plan
| Liquidity plan | January | February | March | April | May |
| 1.) Bank and cash register stocks | € 16,620 | € 25,970 | € 24,410 | € 22,610 | € 22,256 |
| 2.) Deposits and other cash inflows | € 10,875 | € 827 | € 2,042 | € 3,013 | € 2,656 |
| 2a) Payments from operational business | 375 € | € 827 | € 2,042 | € 3,013 | € 3,156 |
| 2b) Prepayment by customers | 500 € | – | – | – | 500 € |
| 2c) Incoming payments from the finance area | – | – | – | – | – |
| 2d) Taking out loans, private deposits, etc. | € 10,000 | – | – | – | – |
| Sum of all available funds for the period | € 27,495 | € 26,797 | € 26,452 | € 25,623 | € 24,912 |
| 3.) Payouts and other cash outflows | € 1,525 | € 2,387 | € 3,842 | € 3,367 | € 3,200 |
| 3a) fixed payments for operational business | 980 € | € 600 | € 600 | € 740 | € 650 |
| 3b) variable payments for operational business (possibly also dependent on VAT) | 402 € | € 1,009 | € 1,448 | € 1,742 | € 1,849 |
| 3c) Outgoing payments from the finance department | – | 340 € | 385 € | € 590 | 340 € |
| 3d) Outgoing payments from investments | – | € 200 | € 1,200 | – | – |
| 3e) taxes | € 143 | € 238 | € 209 | 295 € | € 361 |
| Balance of all deposits and withdrawals | € 9,350 | € 1,560 | 1,800 € | € 354 | € 544 |
This example of a liquidity plan shows you that your liquidity is steadily decreasing. After taking out a loan in January, the balance will be negative in the months thereafter. You are not yet acutely threatened by a loss of liquidity, but you have to create new liquidity. So there is reason to take the first steps now.
Avoid liquidity bottlenecks
If you draw up your liquidity plan taking into account the income and expenses, you can notice very early if there may be bottlenecks . If critical situations emerge, you must take countermeasures as early as possible . For this you have a few options that you can take.
- Taking out new loans
- Negotiate with the bank to lower the amount of loan installments at the bank
- Negotiate new payment terms with your creditors
- Examination of discount options
- Collect all outstanding claims through dunning
- Postpone investments that are not absolutely necessary
- Sell fixed assets
- Review of all expenses
- Minimize maintenance costs for business operations (lower telephone costs, reduce rent payments, etc.)
- Looking for possible investors or business partners
Calculate liquidity scenarios
With the Excel program and the so-called scenario manager, you can develop different scenarios very well. In order to calculate this, you do not have to change all the variable values in the entire table. You can also group these together in a single area. You can then clearly display all developed scenarios in a table. Developing and calculating these scenarios is very important for you. This is the only way you can see which possible outcomes can occur and which decisions you have to make and when.
Tools for a liquidity plan
Liquidity planning is very easy with various computer systems . The positions are predefined, they just have to be supplemented accordingly. The program automatically calculates the available funds and liquid funds. Even Excel keeps tools ready for liquidity planning. In this way, the liquidity plan can be created again and again for other periods, companies save themselves having to list all items again, as they only have to enter the corresponding figures.
Such software tools enable sole proprietorships and freelancers in particular to create detailed liquidity plans. In addition to the operational calculation, the Excel tool can also be used for private liquidity planning. The tool for detailed liquidity planning can be used to plan material, employees and other operational payments.
Liquidity plan as a management tool
A liquidity plan can be made for a full year by breaking it down by month. The liquidity plan shows whether a company has financial reserves or whether financial bottlenecks are imminent. Companies should always have sufficient liquidity reserves. As a rule of thumb, the liquidity reserve must be sufficient for at least three months. But here, too, the following applies: Capable business leaders control the flow of money in the company as required . After all, only as much liquid funds need to remain in the company as necessary. Any excess in the cash reserve will serve better by investing in the company or by making it profitable.
Because – you have to internalize this – too little money in the company is risky, but too much is also bad and can impair the company’s further development.
Tips to ensure liquidity
It is quite possible to improve and secure your liquidity in a short time . The following tips can help you with this.
- Correct and timely invoicing
- Accelerate incoming payments, for example, by reducing payment terms or granting a discount for fast payments
- Drive in your demands consistently
- Prevent payment defaults or payment delays
- Renegotiate your payment terms with your suppliers
- Reduce your inventory or supplies
- Uncover hidden reserves
- Rent out your fixed assets
- Question planned investments
- Reschedule
