Liquidity planning for start-ups

Secured liquidity should definitely be the number one issue for start-ups and founders. As long as business is going well or investment payments are assured, companies are happy 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 are becoming 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 to insolvency. Insolvency often comes gradually and announces itself through the so-called early warning indicators. If an entrepreneur ignores new competitors or customer dissatisfaction, for example, he should not be surprised that sales may fall.

As in a criminal case, the early clues are simply ignored. In retrospect, it would have been easy to recognise them.

Leading indicators from the financescan be mapped very transparently with key figures . Various scenario calculations are used to determine vital liquidity requirements. Fixed costs such as personnel costs, rent, loan repayments, etc. must be covered. In addition, you should always know how long your total liquidity (bank and cash assets and the bank’s current credit limit) will last.

If business is going well, you should pay your debts quickly in order to take advantage of possible discounts and rebates.

You can identify further early warning indicators in the areas of HR, IT, corporate strategy, market and economy. If you would like to find out more about the topic of “early warning indicators and scenario calculations”, read the blog article “Risk management system for start-ups“.

Solid financial and liquidity planning helps you to save money. If you exceed your approved credit limit, your bank will charge additional overdraft interest. If you have an overview of your payments, you will quickly be able to recognise when you need more liquid funds and can avoid costly financing.

If you temporarily have surplus liquidity (e.g. through payments from your investors), you can invest this money intelligently and thus build up a security reserve for the future.

Banks are prepared to grant a higher overdraft facility, especially if sufficient liquidity is available.

Creating a liquidity plan is actually very simple:

Cash and cash equivalents (bank and cash assets) at the beginning of a period

+ Payments received (gross) for the period

– Payments (gross) for the period

= Cash and cash equivalents (bank and cash assets) at the end of a period.

The following table provides an overview of cash inflows and outflows in a company:

Deposits

• Payments from your customers (incl. VAT)
• Loan disbursements by the bank
• Investor funds
• Subsidies
• Capital increases
• Refunds from the tax office and utility companies
• Private deposits
• Sale of fixed assets (also sales and lease back)

Payments

• Gross payments (personnel costs, advertising costs, material purchases, rent, consulting costs, etc.)
• Loan repayments
• Profit distributions/possible dividends
• Advance and subsequent payments to the tax office (VAT, corporate income tax, 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 figures from the past.

You can easily create a monthly liquidity analysis in Excel. With this exercise, you will immediately recognise which payouts are always due. Regardless of whether you generate sales or not. These include rent, personnel costs, leasing installments, etc.

To check whether you have listed all deposits and withdrawals correctly, reconcile the final balance in your Excel file with your bank accounts.

You can now build your planning for subsequent periods on this basis. As a rule, you create your liquidity plan within the framework of the budget. Of course you can start at any time, depending on the reason. Unfortunately, this often only happens after a request from your shareholders or potential investors.

This also shows whether you understand your business. You can certainly plan sales that are far removed from reality. However, the increase compared to the actual figures should be plausibly explainable.

Your investors will be enthusiastic and give you the benefit of the doubt if you can assess your risks and opportunities and present a credible liquidity plan.

You should definitely avoid these mistakes:

1. 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 far too rosy. I therefore recommend that you discuss your planning critically with your mentor or advisor.
2. Net instead of gross figures
   It is initially confusing that your BWA or P&L is based on net amounts, i.e. without VAT, but your liquidity planning is based on gross values (including VAT). You must adjust your ACTUAL BWA accordingly and convert the net amounts into gross amounts. If this seems too complicated for you, just take a look at our seminars on liquidity planning. In these you will learn how to set up your individual planning with the help of an Excel file.
3. Incomplete liquidity planning
   Please don’t forget to take into account the sales tax liability (sales tax minus input tax) because you have to transfer this to the tax office every month. You should also take into account expected refunds or additional payments from, for example, utility companies, back tax payments from the tax office and the repayment installments on your loans. These values are not included in the EBIT of your BWA, but have an impact on your liquidity.
4. Payment terms are insufficiently taken into account
   Lidl and Aldi in Germany have mastered this tactic perfectly. The customer pays before the suppliers are paid. What’s wrong with your payment term being one week? If you grant your customers a payment term of 4 weeks, but you pay your invoices after one week to take advantage of a discount, this can have a negative impact on your liquidity. Checking incoming payments from your customers should be one of your daily tasks. Sales and deposits are often planned too optimistically. If the high level of receivables is only realised at the end of the year when the annual accounts are closed, it is often too late to collect the money from the defaulting payers.
5. Private withdrawals are forgotten – if you do not run a corporation
   Private withdrawals reduce your liquidity, but not your profit. Under no circumstances should you forget to make payments to yourself, i.e. your salary. If you are planning to make a private contribution or are expecting payments from potential investors, you must take this into account in your liquidity planning.