Liquidity Planning: What Is It?

By liquidity planning, we mean managing liquidity and ensuring that you have enough money available when you need it. This includes forward-looking planning to cover daily cash expenses as well as precautionary planning for unexpected events or investment opportunities.

What Does Liquidity Mean for Your Business?

In addition to retrospective financial planning and actionable KPIs — your company's key performance indicators — liquidity planning is an essential component of overall planning.

Creating a detailed plan for the coming months and years to gain an overview of the future financial situation is indispensable. As a rule, financial plans should be as realistic and detailed as possible. Such planning can help companies anticipate problems and take measures to address them in advance. Liquidity planning can be a valuable part of financial planning. It involves ensuring a company's ability to pay and can help entrepreneurs predict short- and long-term liquidity.

Goal of Liquidity Planning

The goal of liquidity planning is to estimate the expected level of future liquidity. It can be used to forecast a company's financial future and is of great value for risk assessment. Indeed, liquidity planning is an important aspect of integrated financial planning, which includes planning for the income statement, balance sheet, and other components.

Optimal liquidity planning can also help generate additional revenue. This is because it enables companies to profitably invest surplus liquid assets as soon as this becomes apparent.

Checklist for Financial Liquidity Planning

Below you will find some important suggestions for optimizing your liquidity planning:

1. Your company's revenue sources — What's coming in? To determine whether you have enough cash to cover costs and potential investments, you need to know all of your company's revenue sources. Compile a complete list of all income sources, for example:
   • Product sales
   • Subscriptions (SaaS, newsletters, masterclasses)
   • Milestone payments from project work
   • Maintenance contracts
   • Dividends, bond interest, capital gains, stock options, or fixed-term deposits
   • Rental properties
2. What is the liquidity value of your assets — The next step is to categorize the liquidity of each income stream, which we will refer to as assets. This includes knowing how easy and expensive it is to liquidate assets. It can also be helpful to find out which assets can be used as collateral to enable efficient and cost-effective borrowing later. Examples of assets:
   • Real estate
   • Machinery
   • Computers / technology
3. Cash requirements — Effective liquidity planning requires knowing what your spending needs are. This includes both short- and long-term cash requirements. This is where a liquidity plan comes in: liquidity planning visualizes income and expense flows over a specific period and allows you to identify surplus liquidity for savings or investment purposes, or income gaps that need to be covered by liquidity reserves. This is critically important, as it is the only way to get an accurate picture of how much surplus liquidity you have that you could invest, for example in:
   • Research & Development
   • New machinery
   • New software
   • Marketing & Sales
4. Scenarios: Divide your liquidity needs into categories:
   • Necessary liquidity: Essential needs — the money required to keep the business afloat
   • Precautionary liquidity reserved for unforeseen events — think pandemics, recessions, or other unexpected events
   • Discretionary liquidity looks different in every company but is typically used for investments and expansion
5. Plan investment and expansion — Effective liquidity planning is not only a risk management tool but should also allow you to proactively plan expansion and/or investments.
6. Plan precisely — Thorough and precise planning minimizes risk and helps identify emerging liquidity events. Liquidity planning should always be as detailed and realistic as possible to effectively optimize the company's financial health.
   • Risk minimization: Avoiding the sale or liquidation of assets under unfavorable market conditions or at high cost premiums
   • Identifying liquidity events, such as incoming pension funds, employee participation plans, insurance policies, and inheritances
   • Liquidity needs, such as investments, renovations, or gifts to children
7. Align your asset allocation with your risk profile — You have now gained an overview of your assets and identified your liquidity needs. The next step is to find the right approach to asset allocation, with the optimal situation being to manage your assets in a way that generates additional returns. If you have done your liquidity planning well, you are better positioned to determine your risk appetite and know what kind of risk you can afford. An important step toward financial stability is ensuring that your asset allocation and risk profile are in balance.
8. Liquidity planning — Planning for both the best and worst case helps ensure that you keep your finances calm and stable during difficult times. Entrepreneurs are constantly confronted with economic uncertainty and financial pressure. Therefore, it is wise to continually reassess the security and stability of your income streams. Review your expenses and revenues regularly. Ideally with a cash flow software. Pay attention to the following:
   • Are all direct debits, standing orders, and regular monthly expenses still necessary?
   • How are your revenues developing?
   • What is the ratio of fixed to variable costs?
   • If companies cut or cancel their dividend payments, does this jeopardize the assets you depend on?