The beginner’s guide to liquidity planning for start-ups

Liquidity planning is crucial for start-ups to ensure that sufficient funds are available to meet liabilities and keep the company running.

Here is a beginner’s guide to creating an effective liquidity plan:

1. Understand the basics:

• What is liquidity? Liquidity refers to the ability of a company to settle its short-term liabilities with available financial resources.
• Why is liquidity planning important? It helps you avoid financial bottlenecks, gives you insights into the financial health of your start-up and supports you in making informed decisions.

2. Collect financial data:

• Revenue: Record all expected revenue from sales, services, payments from investors, banks, grants or other sources. Take into account the payment terms when the money will actually flow. Expert tip: Deposits are always gross, i.e. incl. VAT. Value added tax.
• Expenses: Make a note of all planned expenses, including operating costs, salaries, rent, marketing, loan repayments and IMPORTANT: also the planned VAT payment to the tax office. Expert tip: Check which expenses are gross, i.e. including VAT.

3. Select a time period:

• Start with a manageable period of time, e.g. one month. Once you have gained more understanding, you can expand to quarters or a year.

4. Create a cash flow forecast:

• Initial balance: Start with the existing bank and cash balance at the beginning of the selected period.
• Revenue: Forecast your expected income from various sources.
• Expenses: Estimate your expected expenses for the period. Some expenses are fixed and have to be paid every month (e.g. rent and salaries). Other expenses are variable and may only arise in connection with sales (e.g. purchase of materials or marketing costs)
• Net cash flow: Calculate the difference between income and expenses to determine the net cash flow for each period.
• Closing balance: Add the opening balance to the net cash flow to calculate the closing balance.

5. Take into account payment-related fluctuations:

• If your business is subject to seasonal fluctuations, adjust your forecasts accordingly. If you have a subscription model, it is important to take the churn rate into account in your liquidity planning.

6. Identify bottlenecks:

• Analyse your cash flow forecast to identify potential bottlenecks. Pay attention to periods with negative cash flow. Expert tip: Critically monitor your receivables and liabilities. If you always pay your invoices immediately in order to obtain a discount, this can be dangerous for your liquidity if you grant your customers very long payment terms or do not regularly check your receivables.

7. Create “what-if” scenarios:

• Think about different scenarios, such as loss of 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 to help you keep track of the selected scenarios.

8. Check and update regularly:

• Carry out 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, which you then “freeze”. To update the data, you save a new planning variant every month. The first step is to enter the ACTUAL data and check that your liquid assets 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 industry and number of bookings, it may be worth using tools such as Tidely or ADAM. Expert tip: Talk to digital start-up consultants. They will help you set up an individual liquidity plan and support you in selecting the online tools that are right for you.