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:
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:
To be liquid means colloquially "to be fluid". Or in business terms, you should have enough money in your business account at all times. If the payouts are greater than your deposits over a longer period of time, your company is on the verge of going out of business. Accordingly, liquidity is as important for start-ups as oxygen is for living creatures.