Liquidity planning is an important task in financial management, as it helps to avoid cash shortages and allows managers to optimally control cash flows in the company. Here we show you how to go about it.
Liquidity planning is the process of creating a cash flow forecast for a specific future period. This involves estimating all future cash flows and entering them in a table. By subtracting the outgoing cash flows (expenses) from the incoming cash flows (revenues), one obtains the available cash for this period.
In this way, companies can optimally control their operational business because they can see some time in advance whether a cash shortage is imminent or whether the surpluses are high enough to make an investment.
The aim of liquidity planning is to ensure cash flows so that a company can cover its running costs and meet its financial obligations at all times. It is also intended to prevent a company from taking out unnecessary loans, for example because it makes investments at an inopportune time.
Creating a liquidity strategy involves planning three points:
- Operational cash flows
- Cash reserves
- Strategic cash flows
Operational cash flow planning is short-term and takes place for a period of up to six months. This involves determining which income and expenses are expected in the operational area in the future. This makes it possible to assess whether liquidity is assured for the coming months or whether loans will have to be taken out.
The planning of cash reserves has a medium-term character and takes place for a period of up to one year. In this process, one estimates which expenses one will have in the medium term and which funds one will have to raise for them. In addition, one also plans how to deal with the cash surpluses, for example, what portion of them one sets aside as reserves and what one invests.
Strategic cash flow planning has a long-term character and is prepared for several years. It involves estimating how high the expenses and revenues will be in the long term. Large investments play a role here, which on the one hand represent an expense, but on the other hand also generate income due to their earning power.
A liquidity plan is created by comparing all revenues within a period with the expenses. The difference between revenues and expenses is the cash available for that period.
Revenues and expenses include:
- Revenue from sales
- Income from financial investments
- Tax refunds
- Revenue from licenses
- Other revenues
- Salary payments and wages
- Expenses for marketing
General expenses (electricity, bin collection, etc.)
- Fees for software subscriptions and licenses
- Tax payments
The categories are then entered into a table:
|Cash flow balance at start of year: £3,000||January||February|
|Revenue from sales||£5,000||£6,000|
|Income from financial investments||£500|
|Salary payments and wages||£2,000||£2,000|
|Expenses for marketing||£500||£400|
|Fees for software||£100||£100|
|BALANCE per month||£4,400||-£500|
|TOTAL cash balance = Balance from previous month + baöance from current month||£7,400||£6,900|
The total cash balance at the end shows the liquidity that you have or are likely to have at that time. In this way, liquidity can be planned for several months in advance, so that you can see how it will develop in the coming period.
You can download our free liquidity planning template for Excel. It contains the categories from the example above. However, you can adapt the table according to your needs, adding or omitting categories - depending on what is relevant in your company.
It is only important that you take into account all your deposits and expenses that you have or expect within a month in the calculation. This is the only way to obtain a reliable data basis for making optimal decisions.
Liquidity planning in Excel is very time-consuming and prone to errors: First you have to look at your bank statements, summarise and offset the income and expenses in categories, and then enter them in the Excel spreadsheet. In the process, it is easy to overlook income or expenses, or to make a typing error. The result is incomplete or incorrect liquidity planning.
If you want to make your liquidity planning easier and more efficient, you can use special liquidity management software, for example Agicap. The tool automatically retrieves income and expenses from all your business accounts.
It automatically classifies recurring transactions into categories defined by you and updates your liquidity planning every day. By automating all routine processes, you save a great deal of time and have a reliable database at all times, which helps you to optimally manage liquidity in your company.