What is liquidity planning?
Liquidity planning is a crucial financial management practice that deals with predicting and controlling available cash in a business. It enables companies to assess their financial health and ensure they can meet their short-term financial obligations at any given time. This is crucial because even profitable companies can fail if they do not have sufficient liquid funds to pay their bills.
Why is detailed liquidity planning important?
Ensuring solvency: Liquidity planning ensures that a company can pay ongoing expenses such as salaries, supplier invoices, and rents on time.
Crisis management: In unexpected crises, companies with robust liquidity planning can better respond to unforeseen financial challenges.
Funding for growth: For startups, liquidity planning is crucial to raise capital for their growth. Investors and lenders often require insights into a company's liquidity forecasts before providing funds.
How to create liquidity planning?
-> Capture all cash flows: This involves gathering information on revenues and expenses such as sales revenue, loan repayments, operating costs, salaries, and other financial transactions.
-> Estimate future payments : Based on historical data and market analysis, future revenues and expenses should be forecasted.
-> Consider uncertainties: It is important to allocate buffers for unexpected expenses or fluctuations in the business environment.
-> Create a liquidity forecast : This involves summarizing expected cash inflows and outflows for a specific period, usually 12 months.
-> Regular updates : Liquidity planning should be regularly updated to accommodate changing market conditions and business results.
Conclusion
Liquidity planning ensures financial stability, addresses unexpected challenges, and supports long-term growth. Through careful planning and regular updates to liquidity forecasts, companies can ensure their financial health and enhance their chances of success. Startups should be particularly cautious and tailor their liquidity planning to their specific needs and growth objectives to achieve success.