Start-ups and small enterprises should focus on ensuring solvency. This is more important and more meaningful than looking at, for example, profitability. If you get used to a regular preview and control of your account movements, you have already taken the decisive step towards controlling.

Ask yourself the following questions:

  • What will my monthly receivables payments look like in the next three years?
  • What will my company’s monthly costs look like in detail over the next three years?
  • What monthly liquidity reserve can I expect?
  • How is the profitability forecast and liquidity planning planned in my company?
  • How will I control liquidity during ongoing operations?

Liquidity planning: What is liquidity?

An entrepreneur must at all times be able to pay wages and salaries, liabilities to suppliers, loan repayments, interest, etc. Those who are no longer able to pay their bills are in dire straits. Any payment difficulties arising can quickly decide whether the company “lives or dies”. It is therefore essential that the necessary financial resources are available at all times. To get an overview here, all foreseeable deposits and withdrawals must be listed as accurately as possible (at least monthly). The difference results in over- or underfunding. In the event of underfunding, funds must be obtained. Excess funds can be invested in short-term investments (e.g. in an overnight deposit account or savings account).

Liquidity is the solvency of your company. The time factor plays a special role here. Having an average of 1 million euros in your account can certainly mean there is no money in the meantime. If this is the case at the wrong time, there is a risk of insolvency.

Example: A company that expects large incoming payments but is unable to pay the currently due invoices such as wages or taxes is initially insolvent, even if it would have sufficient liquid funds at its disposal in a few weeks.

Seasonal fluctuations, large orders, payment targets, payment behaviour, tax arrears, annual insurance premiums, debt service or investments have a very strong influence on liquidity. Your liquidity forecast must therefore be as good as possible. When you are just getting started, this is of course the proverbial look into the crystal ball, but it becomes more accurate as you gain more experience.

Liquidity planning: How is liquidity planned correctly?

Liquidity planning and safeguarding is a diligent task—and also a matter for the boss. Do not think that your accountant will take care of this job for you—they primarily look after the numbers of the past.

A simple liquidity plan is helpful to plan and monitor liquidity. This must cover the period of the next six (better still: twelve) months. Use the “Liquidity” module in the financial planning section of your Gründerwerkstatt.

The basic principle applies: Liquidity planning simulates your account balance for the next few months. Enter all the amounts that are expected to flow. The difference between income and expenditure at the end of each month shows you the liquidity (your balance) available to you to meet your financial obligations.

Important: All income and expenses that are already planned in concrete terms or are constant on a monthly basis must be entered as accurately as possible and be justifiable on request, e.g. by the bank. In addition, there are disbursements (and deposits) that are only due on certain dates, such as annual insurance premiums, interest on loans, etc. These are entered in full in the table for the month in question.

If you compare the figures from liquidity planning with the actual figures, you will increasingly gain empirical values. This will make the planning more accurate and help you protect yourself from “unpleasant” surprises.

The following factors have a strong influence on your liquidity calculation:

Due dates for outflows

How many days do you have to pay your suppliers' invoices? How long can you use your money in other ways? Take into account the due dates and not the payment periods that you actually use.

Due dates for inflows

When can you invoice your customers? When can you expect money to flow into your account? What payment terms did you grant the customers? When can you realistically and actually expect payment?

Leaps in growth

Liquidity is additionally burdened by growth. The longer the order lead times, the greater the burden on liquidity. After all, you have to pre-finance wages, rents, materials, etc. during this time.

Tip: Identify separate financing options.

Example: You receive an order from a new major customer. This must be pre-financed with substantial funds (e.g. for material) until the first payments are received.

VAT payments

VAT is often overlooked or forgotten by business founders, but will certainly become due! When products are sold, VAT is invoiced to the customer as a transitory item. It must be paid monthly or quarterly to the tax office. The amount results from the difference between value-added tax and input tax. This amount does not belong to you and must therefore be included in the liquidity planning as a disbursement!

Liquidity planning: Maintain liquidity

The following tips will help you to maintain the liquidity of your company:

Do not use up your current account overdraft facility unnecessarily

Investments in fixed assets must not be at the expense of current liquidity, i.e. they must not be financed with a current account overdraft facility. Investments in fixed assets are usually of a long-term nature and should be financed with long-term loans or equity. The overdraft facility is instead intended for quick and short-term financing. Furthermore, it is comparatively expensive and reduces the scope to compensate for short-term liquidity bottlenecks (e.g. unexpected payment delays).

Ensure careful receivables management

Issue invoices immediately after order completion and set payment targets. Granting discounts offers your customers an additional payment incentive. Monitor incoming payments regularly. Organise your reminder process so that you can react promptly to payment delays. Arrange down payments and/or partial payments for larger orders or for customers you are unsure about. Check the creditworthiness of your customers with credit agencies such as Creditreform or Schufa and the public debtor registers.

Calculate investments realistically

Do not underestimate your capital requirements in your investment planning and also consider follow-up costs, e.g. training employees to use new software. Think about whether the investment makes sense in the long term or whether you only want to cope with a short order boom. If the latter is the case, you could, for example, switch to a subcontractor.

Create liquidity reserves

Liquidity reserves help you to bridge unforeseen payment bottlenecks. “Save” part of your income regularly and invest it with the bank. Important when making investment decisions: You should have short-term liquidity reserves at your disposal.

Liquidity planning: Bridge bottlenecks

If your company is experiencing liquidity problems, immediate measures can help prevent insolvency and diffuse the situation:

  • Make a cash contribution (e.g. private savings) to the company. Sell business assets that you do not necessarily need.
  • Agree payment terms that are as long as possible with your suppliers, but also with other creditors such as the tax office (permanent extensions, etc.).
  • Collect your outstanding receivables. Use debt collection companies if necessary.
  • Ask your credit institution and above all large suppliers for patience! Talk openly with them about your situation! Create trust in the process!
  • Negotiate more favourable conditions with your bank: If possible, increase your credit limit.
  • Get yourself some “fresh” equity.

If the liquidity problems persist over a longer period, your company is likely to be in crisis and you need to think about restructuring measures. By then at the latest, your investors will also carefully consider whether they can continue to trust you. Bear in mind: Restructuring is a matter for the boss.

Sample text: Liquidity
Our costs will fluctuate strongly in the first few months. According to our calculations, the current account overdraft facility does not have to be used in any month. However, we will still apply for a current account overdraft facility at our house bank in the amount of EUR 5,000 as a safety net. Liquidity planning is carried out weekly by Britta Müller. Liquidity in the first year is mainly ensured by our deposits of EUR 30,000. From the fourth quarter onwards in the second financial year, the payments received will exceed the payments made.