Liquidity planning is crucial for start-ups to ensure that there are sufficient funds to meet liabilities and keep the business running.
Here is a beginner's guide to creating effective liquidity planning:
1. Understand the Basics:
- What is liquidity? Liquidity refers to the ability of a business to meet its short-term liabilities with available financial resources.
- Why is liquidity planning important? It helps avoid financial bottlenecks, gives you insight into the financial health of your start-up and helps you make informed decisions.
2. Collect Financial Data:
- Income: Record all expected income from sales, services, payments from investors, banks, grants or other sources. Consider payment terms, when the money will actually flow. Expert tip: Payments are always gross, i.e. including VAT.
- Expenditure: Note down all planned expenses, including operating costs, salaries, rent, marketing, repayments of loans and IMPORTANT: also the planned VAT payment to the tax office. Expert tip: Check which expenses are gross, i.e. including VAT.
3. Choose a Period of Time:
- Start with a manageable period, e.g. one month. Once you have gained more understanding, you can expand to quarters or a year.
4. Create a Cash Flow Forecast:
- Opening balance: Start with the existing bank and cash balance at the beginning of the selected period.
- Revenue: Forecast your expected income from various sources.
- Expenditure: Estimate your expected expenses for the period. Some expenses are fixed and must be paid every month (e.g. rent and salaries). Other expenses are variable and may only be incurred in connection with turnover (e.g. purchase of materials or marketing costs).
- Net cash flow: Calculate the difference between income and expenses to find the net cash flow for each period.
- Ending balance: Add the beginning balance to the net cash flow to calculate the ending balance.
5. Take into Account Cash-Related Fluctuations:
- If your business is subject to seasonal fluctuations, adjust your forecasts accordingly. If you have a subscription model, it is important to consider the churn rate in your liquidity planning.
6. Identify Bottlenecks:
- Analyse your cash flow forecast to identify potential bottlenecks. Watch for periods of negative cash flow. Expert tip: Critically monitor your receivables and payables. If you always pay your invoices immediately in order to get a discount, this can be dangerous for your liquidity if you give your customers very long payment terms or do not regularly check your receivables. 7.
7. Create "What If" Scenarios:
- Think about different scenarios, such as lost sales or late payments from customers. How would these affect your cash flow? Expert tip: Create an Excel spreadsheet and work with drop-down lists that help you keep track of the scenarios you choose.
8. Review and Update Regularly:
- Conduct regular reviews of your liquidity planning to ensure that it is up-to-date and adapts to changing conditions. Expert tip: Create a liquidity plan for the desired period and then "freeze" it. To update the data, save a new planning variant every month. In the first step, you insert the actual data and check that your liquid funds match your bank balances, cash and PayPal accounts. In the second step you update the remaining months and change the income and expenses according to the latest findings.
9. Use Tools:
- In the beginning, I recommend using Excel to get a feel for your numbers. Depending on the sector and the number of bookings, it may be worthwhile for you to use tools such as Tidely or ADAM. Expert tip: Talk to digital start-up advisors. They will help you set up an individual liquidity plan and support you in choosing the online tools that are right for you.
