Understanding Liquidity Planning Through an Example

1. Liquidity planning is a
2. Liquidity planning can be divided into two important time frames: short-term and long-term liquidity planning. Both have different objectives and contribute to ensuring a business's financial stability and flexibility.
3. Especially in economically challenging times or when starting a business, liquidity planning is crucial. It serves to avoid financial bottlenecks and to take measures to secure liquidity in good time. Banks and lenders often require a detailed liquidity plan as part of the business plan to check the financial stability of the business.
4. Liquidity planning is not only a significant tool for businesses, but also a key success factor often deciding the survival of a business. The famous saying "Cash is King" illustrates that sufficient liquid funds are of vital importance for a business. A lack of liquidity can quickly lead to serious financial problems and in the worst case even lead to the business's bankruptcy.
5. The main objective of a liquidity plan is to identify financial risks early. Through the planning of incoming and outgoing payments, businesses can take measures to increase their liquidity, e.g. through targeted receivables management or the optimization of payment terms.
6. There is always a typical schematic structure for a liquidity plan. It looks as follows:
7. The positions in your liquidity plan result from incoming payments (cash inflows) and outgoing payments (cash outflows). The following are the exact definitions:
8. To illustrate the structure of a liquidity plan, we will consider the fictitious example of the business "Affiliate123". The liquidity planning is supposed to cover the period from January to May.
9. Liquidity planning can be eased by the use of specialized tools and software. Businesses like OMR Reviews provide a comprehensive selection of ratings and recommendations for liquidity planning and financial planning tools. Such software, like
10. Profound liquidity planning is essential for every business to ensure solvency and financial stability. By analyzing incoming and outgoing payments, businesses can respond early to financial challenges and take appropriate measures. The use of tools and software can simplify and optimize liquidity planning. Users can find information on the best tools on platforms like OMR Reviews and thereby successfully implement their liquidity planning. This way, you can be sure that your business remains liquid even in difficult times and can grow successfully.

Liquidity planning is a decisive instrument for businesses to ensure their solvency. In this article, we will explain the definition, the importance and the structure of liquidity planning using a detailed example. You will receive clear recommendations and extensive information so that you can better understand and effectively implement liquidity planning. Definition: What is liquidity planning?

Liquidity planning is a

crucial part of financial planning for a business. It enables the analysis and forecast of liquidity development over a specified period. Here, incoming and outgoing payments are compared at their due dates to ensure solvency. A business is liquid when it is able to meet its due liabilities on time.Short-term and long-term liquidity planning

Liquidity planning can be divided into two important time frames: short-term and long-term liquidity planning. Both have different objectives and contribute to ensuring a business's financial stability and flexibility.

Short-term liquidity planning:

Short-term liquidity planning deals with the projection and assurance of a business’s solvency over a near term, typically for the next 3 to 12 months. It is especially important to avoid short-term financial bottlenecks and ensure that the business can meet its liabilities on time.

Measures for short-term liquidity planning:

1. Strict receivables management:

Effective receivables management is crucial to speed up customer payments and minimize the risk of payment delays.2. Optimization of payment terms:

By clever negotiation with suppliers, payment terms can be designed to optimally match the liquidity of the business.3. Liquidity reserve:

Establishing a liquidity reserve can serve as a buffer for unexpected expenses and assure short-term solvency. Long-term liquidity planning:

Long-term liquidity planning extends over a longer period, typically over 1 to 5 years or more. It enables a strategic view of the business's financial situation and helps plan and finance long-term investments.

Measures for long-term liquidity planning:

1. Investment planning:

Long-term liquidity planning considers investments into the business, such as the purchase of capital assets or the introduction of new business areas.2. Financing options:

It is important to identify and evaluate the appropriate financing options for the planned investments. This can include equity as well as debt.3. Growth strategies:

Long-term liquidity planning is closely linked with the business's growth goals. It enables the implementation of a sustainable and successful growth strategy. The importance of both types of planning:

Both short-term and long-term liquidity planning are crucial for the success of a business. The short-term planning ensures that the business can meet its ongoing obligations, while the long-term planning secures the financial health and growth potential of the business.

By integrating and regularly updating both types of planning, businesses can prepare for unforeseen economic challenges while simultaneously seizing opportunities for sustainable growth. A well-thought-out liquidity planning is thus a crucial factor for long-term success and stability of a business in a dynamic business environment.

Why and for whom is liquidity planning important?

 

Especially in economically challenging times or when starting a business, liquidity planning is crucial. It serves to avoid financial bottlenecks and to take measures to secure liquidity in good time. Banks and lenders often require a detailed liquidity plan as part of the business plan to check the financial stability of the business.

The importance of liquidity planning: "Cash is King"

Liquidity planning is not only a significant tool for businesses, but also a key success factor often deciding the survival of a business. The famous saying "Cash is King" illustrates that sufficient liquid funds are of vital importance for a business. A lack of liquidity can quickly lead to serious financial problems and in the worst case even lead to the business's bankruptcy.

Objective of a liquidity plan

 

The main objective of a liquidity plan is to identify financial risks early. Through the planning of incoming and outgoing payments, businesses can take measures to increase their liquidity, e.g. through targeted receivables management or the optimization of payment terms.

The schematic structure of a liquidity plan

 

There is always a typical schematic structure for a liquidity plan. It looks as follows:

Initial stock of liquid funds from bank and cash:

1. This records all available money at the beginning of the considered period, including the cash and bank balance.+ All incoming payments within a period, such as outgoing invoices:

2. This section lists all incoming payments that occur during the observation period. This includes, for example, income from sales and VAT payments.= Available funds:

3. The sum of the initial stock and incoming payments results in the available funds for the respective period.- All outgoing payments that occur within a period (e.g. salaries, rents, loans, etc.):

4. This records all outgoing payments that occur during the observation period. This includes, for example, expenses for goods, personnel costs, rents, loan repayments and other operational expenses.= Cumulative liquidity:

5. The cumulative liquidity results from the difference between the available funds and the outgoing payments. It shows the balance between incoming and outgoing payments and indicates how liquidity changes over time.Positions for the creation of the liquidity plan

The positions in your liquidity plan result from incoming payments (cash inflows) and outgoing payments (cash outflows). The following are the exact definitions: 

Incoming payments:

Expected incoming payments:  

• Incoming payments that originate from operational activity

  • VAT payments

  • Other incoming payments:

• Disposal of assets

  • Loan uptake

  • Interest payments

  • Tax refunds and other refunds

  • Private deposits (this only applies to sole proprietors)

  • Cash and cash balance: All cash balances in your cash register

  • Outgoing payments:

Purchase of goods: All outflows due to the purchase of goods 

• Personnel costs, social security contributions, special payments

• Long-term contracts: e.g. subscriptions

• Other operating expenses:

• Repayment of loans

  • Rent payments

  • Leasing installments

  • Car costs

  • Purchases of assets

  • Costs for advertising

  • Costs for telecommunications

  • VAT

  • Consulting costs

  • Travel costs

  • Training costs

  • Costs for repair

  • Private removals by sole proprietors

  • Costs for Payment Services

  • The precise recording and structured listing of these positions allows for precise liquidity planning to avoid shortfalls and ensure the financial stability of the business. Well-thought-out liquidity planning is essential to keep the business on track and to be prepared for a successful future.

 

Structure of a liquidity plan (with example)

 

To illustrate the structure of a liquidity plan, we will consider the fictitious example of the business "Affiliate123". The liquidity planning is supposed to cover the period from January to May.

For our example, we will assume that the revenues of Affiliate123 are instantly effective as payments, meaning that customers pay their invoices without any delay. So, revenues are the same as incoming payments here.

Difference between revenues and incoming payments

However, please note that revenues are not always the same as incoming payments. Revenues represent the turnover or profits of a business, based on services provided or products sold. They are recorded at the time the service was provided or the sale took place, regardless of whether the money has actually been received yet.

In contrast, incoming payments represent the actual money received, which has been paid into the business cash register. There can be delays between the time of recording revenues and the time of incoming payment, for example due to payment terms or delays in the payment process.

Month: January

Initial stock of liquid funds (Bank and Cash): 

€16,620Incoming payments and other cash inflows:

In January, Affiliate123 achieved revenues from operative business of €375, which resulted from the sale of advertising spaces on their platform. In addition, they received an advance payment from customers of €500 for new advertising placements.

Outgoing payments and other cash outflows:

In the same month, the business had to make expenses totaling €1,920. These expenses included material purchases, such as server costs of €980, wages to their employees of €600 and fixed costs such as office rent and insurances of €340.

Monthly balance:

The incoming payments amounted to €875, whereas the outgoing payments reached €1,920. So, there was a negative liquidity inflow of -€1,045 and the final stock of liquid funds was €15,575.

Month: February

 

Initial stock of liquid funds: 

€15,575Incoming payments and other cash inflows:

In February, Affiliate123 made revenues from operative business of €450 and received an advance payment from customers of €480.

Outgoing payments and other cash outflows:

The expenses in February totaled €1,920. This included €980 for material purchases like server costs, €600 for employee wages and €340 for fixed costs like office rent and insurances.

Monthly balance:

In February, incoming payments amounted to €930, whereas outgoing payments reached €1,920. So, there was again a negative liquidity inflow of -€990 and the final stock of liquid funds was €14,585. 

Month: March

 

Initial stock of liquid funds: 

€14,585Incoming payments and other cash inflows:

In March, the business made revenues from operative business of €420 and received an advance payment from customers of €500.

Outgoing payments and other cash outflows:

The total expenses in March were €1,920. This includes material purchases (e.g. server costs) of €980, wages to employees of €600 and the fixed costs (office rent, insurances) of €340.

Monthly balance:

In March, incoming payments of €920 were recorded whereas outgoing payments were €1,920. Consequently, there was again a negative liquidity inflow of -€1,000 and the final stock of liquid funds was €13,585.

Month: April

 

Initial stock of liquid funds: 

€13,585Incoming payments and other cash inflows:

In April, Affiliate123 made revenues from operative business of €520 and received an advance payment from customers of €450.

Outgoing payments and other cash outflows:

The total expenses in April were €1,920, which were made up of material purchases (e.g. server costs) of €980, wages to employees of €600, and fixed costs (office rent, insurances) of €340.

Monthly balance:

In April, incoming payments of €970 were recorded whereas outgoing payments amounted to €1,920. Therefore, there was a negative liquidity inflow of -€950 and the final stock of liquid funds was €12,635.

Month: May

 

Initial stock of liquid funds: 

€12,635Incoming payments and other cash inflows:

In May, Affiliate123 made revenues from operative business of €550 and received an advance payment from customers of €480.

Outgoing payments and other cash outflows:

The total expenses in May were €1,920, which consisted of material purchases (e.g. server costs) of €980, wages to employees of €600, and fixed costs (office rent, insurances) of €340. 

Monthly balance:

In May, incoming payments of €1,030 were recorded whereas outgoing payments were €1,920. Thus, again, there was a negative liquidity inflow of -€890 and the final stock of liquid funds was €11,745.

Helpful tools/software for liquidity planning

 

Liquidity planning can be eased by the use of specialized tools and software. Businesses like OMR Reviews provide a comprehensive selection of ratings and recommendations for liquidity planning and financial planning tools. Such software, like

enable more precise and efficient planning by supporting the automatic categorization of cash flows and predictive decision-making. In another article, we have summarized the Tidely

best software for liquidity planning for you.Additionally, the following tools can support you in your liquidity planning:

 

Furthermore, we would like to recommend our article with a downloadable

• Agicap
• COMMITLY
• Helu
• Tidely

template for a liquidity plan. Conclusion

Profound liquidity planning is essential for every business to ensure solvency and financial stability. By analyzing incoming and outgoing payments, businesses can respond early to financial challenges and take appropriate measures. The use of tools and software can simplify and optimize liquidity planning. Users can find information on the best tools on platforms like OMR Reviews and thereby successfully implement their liquidity planning. This way, you can be sure that your business remains liquid even in difficult times and can grow successfully.

Eine fundierte Liquiditätsplanung ist für jedes Unternehmen unerlässlich, um Zahlungsfähigkeit und finanzielle Stabilität zu gewährleisten. Durch die Analyse von Ein- und Auszahlungen können Unternehmen frühzeitig auf finanzielle Herausforderungen reagieren und geeignete Maßnahmen ergreifen. Mithilfe von Tools und Software wird die Liquiditätsplanung erleichtert und optimiert. Nutzer*innen können auf Plattformen wie OMR Reviews Informationen zu den besten Tools finden, um ihre Liquiditätsplanung erfolgreich umzusetzen. So hast du die Gewissheit, dass dein Unternehmen auch in schwierigen Zeiten liquide bleibt und erfolgreich weiter wachsen kann.