5.2 Liquidity planning

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Course: Company Foundation (MOVIDIS)
Book: 5.2 Liquidity planning
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Date: Friday, 10 January 2025, 7:25 AM

Description


Introduction

Liquidity is defined from the company's liabilities to liquid assets. The company must be able to meet its current obligations at all times. Even a profitable business can become insolvent - illiquid. This can happen, for example, if a main customer itself defaults on payments or a loan can no longer be serviced on time. Liquidity problems are among the biggest problems and most frequent causes of insolvency. Young companies are often affected by this because they do not have enough equity capital available. To prevent this from happening, liquidity must be planned. 

Liquidity planning must be carried out systematically. The liquidity calculation must be based on a monthly business management statement (BWA) and the profit and loss statement. All income and expenditure must be compared. A prerequisite for this is a meaningful cost accounting system. The monthly surplus (surplus cover) or deficit (deficit cover) results from the difference between income and expenditure.

The calculation parameters for liquidity planning are receipts = payments in and expenditures = payments out. These directly change the available financial resources (cash or cash equivalents). The actual time of payment is decisive for the actual recording or allocation of incoming payments and outgoing payments, as this results in a direct change in the cash balance in the company. It is not the date of invoicing that is significant, but the actual payments in and payments out.

In order to facilitate planning in a business plan, it is initially sufficiently accurate to assume the income statement data as the basic data for liquidity planning. The P&L data should be considered and explained from a liquidity impact perspective. If payment delays are to be expected in revenues or in disbursements, these should be explicitly named.

Depreciation and imputed costs that increase expenses in the income statement must be considered separately in liquidity planning. As these are non-cash transactions, they increase liquidity.

In order to determine liquidity, all incoming payments must be compared to all outgoing payments. In order to ensure liquidity at all times, the sum of incoming payments must always be greater than the sum of outgoing payments. The company thus builds up a liquidity reserve. If the sum of outgoing payments exceeds the sum of incoming payments, capital must be injected. This is done through financial planning or capital requirements planning. The sum of all negative individual amounts or the operating result in the P&L results in the total capital requirement over the planning period.

5.2.1 Liquidity levels

The term liquidity has a double meaning.

a)       Liquidity as a property of an asset (fixed capital),

b)       Liquidity as a company's willingness to pay (working capital).

To a) How quickly can an object be converted into money?

Re b) How can the payment obligations always be met on time?

The comparison of cash and cash equivalents with liabilities yields the liquidity ratio. Liquidity ratios:

  • Liquid funds 1st order = cash liquidity that is immediately tangible such as cash, bank and postal cheque balances, discountable bills of exchange.
  • Liquid funds 2nd order = collection-related liquidity that can be made liquid within 3 months, e.g. customer receivables, securities.
  • Liquid funds 3rd order = turnover-related liquidity that can only be made liquid after a longer period of time, e.g. work in progress, raw materials.
  • Illiquid assets are those that are very difficult to convert into cash, such as land, buildings, machinery.

 

1st degree liquidity:

 

Cash and cash equivalents 1st order

* 100 %

à

15.000 €

* 100 = 30 %

 

Current liabilities

50.000 €

 

 

Liquidity 2nd degree:

 

Cash and cash equivalents 1st + 2nd order

* 100 %

à

60.000 €

* 100 = 120 %

 

Current liabilities

50.000 €

 

 

Liquidity 3rd degree:

 

 

Fl. means 1st + 2nd + 3rd order

* 100 %

à

90.000 €

* 100 = 180 %

 

Current liabilities

50.000 €

 

 

 

 

 


5.2.2 Generate liquidity

1.       Liquidity planning must first be based on the capital required for investments. The equity capital and the borrowed capital are to be determined. The capital deficit must be determined. The dates for investments etc. must be determined and summarised in a payment plan. 

2.       Next, the planned turnover and the revenues are to be determined from the income statement or the profit and loss account. All disbursements are to be deducted from the revenues.

3.       It must be determined whether the revenues (proceeds) have been received in the own account at the specified time or whether a delay in payment is to be assumed. In the case of payment terms of 30 days, the revenue entry in the liquidity planning must be postponed by this period. This is particularly important when setting up a business, as income may be slow in coming in during the first few weeks. An OP list (open items) is necessary. In the event of delayed payment, several months' revenue should be planned as liquidity credits in the capital requirements planning.

4.       The income is to be compared with the expenses (costs). All costs of the P&L are to be included. It should be noted that depreciation increases liquidity. 

5.       When determining the expenditure of money, it must be determined how high the monthly surpluses and losses are. Surpluses contribute to liquidity, losses have to be financed.

6.       Liquidity can be severely strained in the case of outstanding debts (receivables). Collecting debts through dunning procedures is a costly and unpleasant business. It must be determined how high the outstanding debts can be for a transaction, and liquidity must be kept available for this.

7.       Accounts receivable can be turned into revenue with the help of factoring. With factoring, a company assigns its accounts receivable to a specialised company (factor) and receives a part of the receivables paid out immediately in return. The loss of receivables has an effect on liquidity. Checking suppliers and customers is the best precaution against bad debts.

8.       In order to generate liquidity, the company's own liabilities must be collected. On the other hand, the company can exhaust payment targets itself.

9.       The planning and constant control of liquidity is a matter for the boss. Those who do not have a constant overview of the commercial processes in their company are at high risk.

5.2.3 Liquidity forecast

Liquidity can be calculated in the business plan on the basis of the profit and loss account (P&L). This simplifies the calculation, as the positions can be taken over directly and adjusted to the liquidity forecast.

A. Revenue

Month

Jan.

1

Month

Feb.

2

Month

X

3…

Sum 1st year

Sum 2nd year

Sum 3rd year

 

Liquidity status:

 

 

 

 

 

 

Investment income

 

 

 

 

 

 

+ Income from equity

 

 

 

 

 

 

+ Income from borrowed capital

 

 

 

 

 

 

= Total initial liquidity

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue from sales

 

 

 

 

 

 

+ Total sales revenue

 

 

 

 

 

 

+ Total other operating income

 

 

 

 

 

 

+ Changes in inventories

 

 

 

 

 

 

+ Income from reversals of
provisions

 

 

 

 

 

 

+ other income Ordinary
business activity

 

 

 

 

 

 

+ Write-ups from
fixed assets

 

 

 

 

 

 

 + Total depreciation

 

 

 

 

 

 

Revenue from sales

 

 

 

 

 

 

Total revenue = liquidity

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenditure

 

 

 

 

 

 

- Preliminary costs of the foundation

 

 

 

 

 

 

- Expenditure of the corporate

  purchase

 

 

 

 

 

 

- Expenditure for investments

 

 

 

 

 

 

- Rental deposit expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Current operating expenses

 

 

 

 

 

 

 - Sum of the material costs,

   Auxiliary costs...

 

 

 

 

 

 

 - Total external costs

 

 

 

 

 

 

 - Total personnel costs

 

 

 

 

 

 

 - Total social costs

 

 

 

 

 

 

 - Total other operating
expenses

 

 

 

 

 

 

 - Total rental costs, ancillary costs...

 

 

 

 

 

 

 - Total insurance

 

 

 

 

 

 

 - Total maintenance

 

 

 

 

 

 

 - Total marketing

 

 

 

 

 

 

 - Total consulting costs, legal,
taxes...

 

 

 

 

 

 

 - Total borrowing costs, monetary transactions

 

 

 

 

 

 

 - Total leasing

 

 

 

 

 

 

 - Losses from the disposal of fixed
assets

 

 

 

 

 

 

 - Losses from the formation of

    Provisions

 

 

 

 

 

 

 - Other costs

 

 

 

 

 

 

 - Interest expenses

 

 

 

 

 

 

Total expenditure

 

 

 

 

 

 

Result of ordinary activities

Business activity

+ extraordinary income

Month

Jan.

1

Month

Feb.

2

Month

X

3…

Sum 1st year

Sum 2nd year

Sum 3rd year

- extraordinary expenses

 

 

 

 

 

 

- Taxes

 

 

 

 

 

 

- Expenditure on investments
Performance readiness

 

 

 

 

 

 

- Expenditure for investments in the
production of services

 

 

 

 

 

 

- Expenses of the company foundation / takeover

 

 

 

 

 

 

- Extraordinary losses,
bad debts

 

 

 

 

 

 

Surplus = liquidity

 

·         There shall be no shortfall

 arise!

Table 8: Liquidity forecast

 

* There must be no shortfall in the liquidity planning of the business plan, otherwise the insolvency of the enterprise would have to be established. Liquidity gaps must be made up beforehand! by increasing equity or debt capital.