Yes, start-ups need liquidity planning. Liquidity planning is a crucial tool to ensure that a start-up has sufficient liquid assets to meet its current obligations and avoid financial bottlenecks.
The Main Reasons Why Start-Ups Should Have Liquidity Planning Are the Following:
1. Ensure solvency: Liquidity planning helps start-ups to ensure their solvency. It provides information about the expected cash flow when revenues will be generated and when expenses will be incurred. This enables start-ups to recognise at an early stage whether there might be bottlenecks in liquidity and to take timely measures to avoid them.
2. Ensure financial stability: Sound liquidity planning enables start-ups to ensure their financial stability. It provides transparency on the availability of liquid assets and supports management in the timely payment of bills, salaries, rents, and other liabilities.
3. Create a basis for decision-making: Liquidity planning serves as a basis for management decisions. It enables an accurate assessment of the financial impact of decisions such as investments, cost savings or financing measures. This enables well-founded decisions to be made to optimise the liquidity of the start-up.
4. Determine financing needs: Liquidity planning helps to determine the start-up's financing needs. It shows whether the start-up needs additional capital to maintain its current operations, to finance growth initiatives or to cover unforeseen events. This allows appropriate financing measures to be initiated in good time.
5. Investor relations: Solid liquidity planning is also very important for investor relations. Investors want to see that the start-up has a solid financial basis and sufficient liquid funds to carry out its business. A convincing liquidity plan can strengthen investor confidence and arouse the interest of potential investors.
The Following Instructions Show You How to Carry Out Liquidity Planning for Your Start-Up:
1. Record all revenues: Start by recording all expected income for the planning period. This includes revenues from sales, services, subscriptions, royalties or other sources of income. Also consider seasonal fluctuations or delays in payment. It is important to note that payments must always be gross, i.e., including VAT.
2. List all expenses: Make a comprehensive list of all expenses incurred during the planning period. This includes current expenses such as rent, salaries, supplier costs, marketing expenses, insurances, etc., as well as one-off expenses such as investments or tax payments. The expenses must also be listed gross. In contrast to the profitability analysis, i.e., the examination of the P&L, the profit or loss, the liquidity planning always deals with the incoming payments or outgoing payments on your bank account.
3. Consider the timing of payments: It is important to consider the timing of payments. Not all expenses are due immediately. Some may be staggered monthly, quarterly, or annually. Identify the exact time when payments are expected to get an accurate overview of the cash flow. The OPOS lists of your tax advisor can help you with this. The OPOS list is the abbreviation for open items and is provided as standard in the tax advisor's reports every month.
4. Identify bottlenecks and surpluses: Analyse your projected liquidity plan to identify potential shortages or surpluses. Look at whether there are periods when expenditure exceeds income, resulting in negative liquidity. Also check if there are periods of positive liquidity where a surplus of cash is expected.
5. Act: Based on the findings of the liquidity planning, you can take measures to optimise liquidity. This can include adjusting expenses, finding additional sources of income, negotiating payment terms with suppliers or initiating financing options.
6. Create a periodic reporting: Depending on the financial situation, liquidity planning should be updated at least once a month, in bottleneck situations even weekly or daily. To be able to carry out a target/actual comparison, a monthly liquidity planning should also be carried out once a year as part of the budget planning. In the monthly comparison with your actual figures from your tax advisor or your bank accounts, you can see in which months your receipts were not correct.
Over time, you will get a better feel for your numbers and your planning quality will improve.
It is helpful to contact an expert from our team or attend an open workshop. They will help you to create a well-founded and meaningful liquidity planning and can also give you valuable support in the selection of possible planning tools.