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Why is liquidity planning important?

Liquidity planning

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The liquidity of a company plays a decisive role in the context of financial management. In the short term, the company's liquidity is more important than making a profit. To avoid insolvency, the company must have sufficient liquidity at its disposal at all times. Sufficient liquidity is essential for survival, especially in difficult economic times. To ensure this, serious financial and liquidity planning is absolutely necessary. Numarics explains why and how.

Why is liquidity planning necessary?

From a legal point of view, liquidity planning for certain types of company (in particular for stock corporations (AG) and limited liability companies (GmbH)) is anchored in law. According to Art. 716a Para. 1 OR, the design of the accounting system, financial control and financial planning are among the non-transferrable and inalienable tasks of the Board of Directors. Liquidity planning is one area of the financial planning mentioned in the law. From an economic point of view - and this now applies to all companies and especially to start-ups - a company needs liquidity planning in order to be able to ensure solvency at all times.

Liquidity comes from Latin and means "liquid". In relation to a company, "liquid" means the liquid means of payment available in a company, such as cash or bank balances (from a business point of view, one could also include the short-term available, guaranteed credit limits that have not yet been called). A "liquid" company can therefore pay all pending invoices on time.

On the other hand, if you don't plan the short-term liquidity of a company, this can quickly lead to problems. In the first phase, this is usually not dramatic, but, for example, bills can no longer be paid on time. This leads to the first reminders. Over time, the reminders accumulate, which can also cause additional reminder fees. If the situation worsens, it is possible that business partners will only deliver against prepayment or, if need be, end a business relationship entirely. At that point at the latest, your own service provision process will also be affected by the liquidity crisis. If you do not take effective countermeasures in good time in such a case, this almost inevitably leads to debt enforcement and in some cases to insolvency. Reliable liquidity planning is therefore essential for every company. However, one must not forget that even careful financial planning does not always protect against unexpected developments - it is and remains a plan.


A pleasant aspect of liquidity planning can be that one finds excess liquidity. In this case, the management has to consider how to deal with this situation or what to do with the available funds. This decision is related to the question of whether the excess liquidity is short-term or whether this condition is long-term in nature.


How does liquidity planning work?

In principle, liquidity planning is a very simple matter. You start with the current liquidity (stock of cash and cash equivalents) and ask yourself which cash inflows the company can expect and what cash outflows are incurred. This results in the new liquid funds. You can do this on a daily basis, weekly or even monthly; it depends on the type of business. In most companies, the short-term liquidity plan is set up on a monthly basis and plans to ensure liquidity in the sense of an early warning system. If bottlenecks are identified, effective measures must be taken at an early stage.

Incoming payments result primarily from the sale of products and services. It should be noted that not all (or no) sales are made in cash, but initially represent a claim against a customer. In this case, the receipt of payment will be delayed. Assumptions must be made for the chronological sequence, for example 60% of the invoice amounts in the following month, a further 30% within two months, a further 7% within three months and the remaining 3% are considered uncollectible for planning purposes. These assumptions should be as realistic as possible, but still cautious and based on empirical values.

Capital increases or borrowing also result in an inflow of liquid funds.

Outgoing payments consist, for example, of the items listed below (the list is not exhaustive):

• Costs such as the purchase of goods (raw materials, merchandise, auxiliary materials such as packaging) - these costs are typically variable in relation to the provision of services - they rise and fall more or less evenly, e.g.

• Personnel costs (incl. social security and income tax) - depending on the legal structure, personnel costs are fixed costs, but it may be possible to design part of the personnel costs as variable costs (e.g. for hourly wages),
• Other operating expenses, such as rent including ancillary costs, marketing expenses, travel expenses, various administrative expenses, consulting and legal costs, insurance, leasing rates, etc. - some of these costs are fixed and therefore easy to plan (e.g. rent or insurance), others such as consulting and legal costs are more difficult to plan,
• Repayment of debt capital (bank loans or private loans) including interest payments,
• Repayment of equity and payment of a dividend,
• Taxes (VAT and income and capital tax)
• Investments - these must be planned carefully, since they usually lead to a larger outflow (note: subsequent depreciation of assets then only leads to an expense, but no longer to an outgoing payment),
• Private withdrawals by the entrepreneur, unless these are already listed in the personnel expenses.

Since liquidity planning is based heavily on experience, it is easier for established companies to develop than for start-ups. Here the uncertainties are higher, in particular the sales and their chronological sequence are more difficult to estimate.

Tips for conserving and securing liquidity

First things first: always be economical with liquidity and question any expenses.

Based on your financial and liquidity planning, you should identify long-term and short-term capital requirements at an early stage. Get in touch with the bank at an early stage – a bank becomes suspicious if a liquidity bottleneck “suddenly” occurs. But if you seek a conversation early on based on serious planning, then banks are usually happy to help, because that is a bank's core business. If you prefer to cover the capital requirements with equity, then remember that a capital increase by equity providers also requires a lead time.

Operate an active and effective receivables management. Invoices are to be created immediately after the service has been rendered. For long-term work, agree on payment on account. If necessary, set incentives for quick payment (discount). Use a payment reminder to send a polite, but quick and firm reminder as soon as a debtor is in arrears. With difficult customers, you can work on the basis of down payments or prepayment.

You can also do a lot with regard to the outputs. For example, request several offers for services that you are purchasing. The price differences but also the terms of payment are sometimes large. And don't be afraid to negotiate the price. Experience shows that a discount is often possible or payment terms are adjusted.

For some costs, it is worth considering whether you can not make a part variable. For example, in the human resources area through the use of freelancers or - depending on the industry - in the rental depending on the turnover.
When investing, you should also think carefully about whether you have to make the purchase now or whether leasing or renting would make more sense. And if you have to make a purchase, then you have to get several offers for it. And, of course, the operating and follow-up costs must also be taken into account when making purchases.

If things get tight despite good planning, then these tips can be checked:
• Short-term increase in the current account limit
• Make full use of payment deadlines for invoices
• Negotiate installments or a settlement with creditors
• Explore reduction of personnel costs
• Reduce overtime instead of paying it out
• Renegotiate loan amortization rates
• Consider sale of non-core assets and/or sale and lease back
• Reduce customer payment terms or resort to factoring.

Of course, the measures mentioned are not always applicable to every company, but must be checked individually and individually.
With Numarics as your digital CFO, you have an excellent platform for planning and monitoring your finances with pinpoint accuracy. Use your dashboard to keep a constant eye on and control key figures in your company.

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