Secured liquidity should definitely be the No. 1 topic for start-ups and founders. As long as business is going well or there is an assurance of investment payments, companies would like to dispense with liquidity planning or even a financial plan.
Corona and the war in Ukraine have shown that a company can find itself in a crisis virtually overnight. Your customers become more cautious and investors have also become more cautious in their allocation of investment funds.
But it is not always global crises that lead a company into insolvency. Often, insolvency comes insidiously and announces itself through the so-called early warning indicators. If, for example, an entrepreneur ignores new competitors or the dissatisfaction of his customers, he should not be surprised if there is a drop in sales.
As in a criminal case, the early indications are simply ignored. In retrospect, these could have been recognized without any problems.
Early indicators from the area of finance can be mapped very transparently with key figures. With various scenario calculations, one knows the vital liquidity requirements. Fixed costs, such as personnel costs, rent, loan repayments, etc., absolutely have to be covered. In addition, one should always know how long the total liquidity (bank as well as cash assets and the current credit limit of the bank) will last.
If business is good, one should pay one's debts quickly in order to take advantage of possible discounts and rebates.
You can identify other early warning indicators in the areas of human resources, IT, business strategy, market and economy. If you would like to learn more about the topic of "early warning indicators and scenario calculations", read on in the blog article "Risk Management System for Start-Ups".
A solid financial and liquidity planning helps you to save money. If you exceed your approved credit limit, your bank will charge you additional overdraft interest. If you have an overview of your disbursements, you are quickly able to recognize when you need more liquid funds and can avoid costly financing.
If you temporarily have excess liquidity (e.g. through payments from your investors), you can invest this money intelligently and thus build up a security reserve for the future.
Especially if there is enough liquidity, banks are willing to grant a higher overdraft line.
Actually, creating a liquidity plan is very simple:
Liquid assets (bank and cash assets) at the beginning of a period
+ Receipts (gross) of the period
- Outflows (gross) of the period
= Liquid funds (bank and cash assets) at the end of a period.
The following table shows an overview of cash inflows and outflows in a company:
- Payments from your customers (incl. sales tax)
- Loan payments from the bank
- Investor funds
- Capital increases
- Reimbursements from tax office and utility companies
- Private deposits
- Sale of fixed assets (also sales and lease back)
- Gross disbursements (personnel costs, advertising costs, material purchases, rent, consulting costs, etc.)
- Loan repayments
- Profit distributions / dividends, if any
- Advance and subsequent payments to tax office (UST, KöSt, trade tax, wage tax) and utility companies
- Depending on the legal form, private withdrawals
To get a better feel for your own figures, I recommend starting with past figures.
You can easily set up a monthly liquidity analysis in Excel. With this exercise you will immediately recognize which withdrawals always occur. Regardless of whether you generate sales or not. This includes rent, personnel costs, leasing rates, etc.
In order to check whether you have listed all incoming and outgoing payments correctly, you should reconcile the final balance in your Excel file with your bank accounts.
On this basis you can now build your planning for the following periods. As a rule, you create your liquidity plan within the framework of the budget. Of course, depending on the reason, you can start at any time. Unfortunately, this often happens only after the request of your shareholders or potential investors.
This also shows whether you understand your business. Surely you can plan turnovers that are far away from reality. However, the increase compared to the actual figures should be plausibly explainable.
Your investors will be enthusiastic and give you a leap of faith if you can evaluate your risks and opportunities and present a credible liquidity plan.
You should avoid these mistakes at all costs:
- Sales expectations instead of plausible assumptions
Due to a lack of experience, founders often tend to plan their sales growth too optimistically. Of course, your liquidity planning looks way too rosy. Therefore, I recommend you to critically discuss your planning with your mentor or advisor.
- Net instead of gross figures
It is irritating at first that your BWA or P&L is based on net figures, i.e. without VAT, but your liquidity planning is based on gross figures (incl. VAT). You have to adjust your ACTUAL BWA accordingly and convert the net amounts into gross amounts. If this seems too complicated for you, just have a look at our seminars for liquidity planning. In these seminars you will learn how to set up your individual planning with the help of an Excel file.
- Incomplete liquidity planning
Please do not forget to take into account the sales tax payment burden (sales tax minus input tax), because you have to transfer it to the tax office every month. Furthermore, you should take into account expected refunds or additional payments from, for example, utility companies, additional tax payments from the tax office and the repayments of your loans. These values are not included in the EBIT of your BWA, but have an impact on your liquidity.
- Payment terms are insufficiently considered
Lidls and Aldis in Germany master this tactic perfectly. The customer pays before the suppliers are paid. What is wrong with a payment term of one week? If you give your customers a payment term of 4 weeks, but you pay your invoices after one week in order to take advantage of a discount, this can have a negative impact on your liquidity. Checking the incoming payments of your customers should be part of your daily tasks. Often, sales and incoming payments are planned too optimistically. If you do not realize the high level of receivables until the end of the year when you close the accounts, it is often too late to collect the money from the defaulting payers.
- Private withdrawals are forgotten - if you do not run a corporation
Private withdrawals reduce your liquidity, but not your profit. Payments to yourself, i.e. your salary, must not be forgotten under any circumstances. If you are planning to make a private contribution or are expecting payments from potential investors, you must take these into account in your liquidity planning.