• Eva Harmeling Content Creator Eva Harmeling
  • 01.12.21
  • 7 min read

Your cash flow at one glance: Why good liquidity planning is so important

why good liquidity planning is important

“Money makes the world go round!” – unpopular platitude or the truth after all? For companies, at least, it’s true: money is the means that keeps them going. This makes it all the more important to always keep an eye on the cash flow, the heartbeat of the company. What revenues can be expected and what expenses do you have to reckon with? The following figures show how important good liquidity planning is:

Companies like Airbnb and Uber are said to have teams of +200 people, whose main job is to monitor the financial health of the business in real time, both cash on hand and deposits and disbursements.

Impressive, right? Whether Airbnb manages its liquidity planning with a traditional Excel spreadsheet and its scenario manager, or how the staff update each other on monitoring and planning, we don’t know. However, the importance of liquidity planning – for large companies, but especially for small and medium-sized enterprises – is very apparent here.

Why is liquidity planning especially relevant for SMEs? Because it is important to know the cash flow, especially for companies that have been just founded or are growing rapidly. Small and medium-sized companies that are self-financed need liquidity planning in order to think about investments and thus ensure the further development of the company. They draw their liquidity from their profits plus loans. Start-ups and SMEs, on the other hand, which are leveraged by investors and usually do not operate profitably yet, need the liquidity plan to calculate burn rate and runway and to create different growth scenarios to plan the further development of the company.

3 reasons why good liquidity planning is essential

While in the past, the scenario manager may have been more of a gimmick for many companies, the 2020 pandemic and associated financial crisis has given a whole new meaning to the “worst case scenario”. Home offices, lockdowns, and disrupted supply chains have caught many companies unprepared and caused them to lose revenue. Anyone, who has factored such an unforeseen scenario into their liquidity plan, might be called a fortune teller.

Ideally, you learn from such crises: Therefore, a complete and error-free liquidity plan today is more important for your company than ever. Why should you take another controlling look at your figures and scenarios, especially now at the end of the year?

  1. Perhaps you made less revenue last year and had to take out a loan? Both of these things impact your cash flow and should be considered for the next period and years to come
  2. Your team is still or yet again split between office and home office? A daily update of your cash planning helps to keep all financial officers and especially the management in the loop. Even better? A liquidity plan that provides an overview of the development of your cash flow in real time and that is accessible as a software solution for staff
  3. You can already identify possible weak points for the coming business year and can adjust your strategy accordingly, taking into account various scenarios

With a well-managed liquidity plan, you’ll be on top of things even in uncertain times, thanks to accurate knowledge of your capital and cash reserves. Furthermore, you’ll be able to make informed decisions.

A brief recap: This is how a liquidity plan is built

In the liquidity plan, only cash flows affecting payments are taken into account. It is particularly important to correctly show the timing of revenues and expenses. This belongs in your liquidity planning:

  • Before you start: check the initial inventory of cash and on all bank accounts.
  • All incoming payments of a planning period (cash and cash on hand, expected receipts through invoicing, credits, tax refunds, etc.)
  • Disbursements such as purchase of goods, costs for staff, social security contributions, special payments, subscriptions, leasing, credit approval, investments, etc.

The initial inventory plus incoming payments minus disbursements then equals your cumulative liquidity. With a well-managed liquidity plan, you can identify risks in advance and counteract liquidity bottlenecks at an early stage. As a rule of thumb, the liquidity reserve should last for at least three months – after the financial crisis of 2020 and months of lockdown in many areas, an even larger reserve might be recommended in the future. However, a company should not have too much free-floating money, but should distribute and invest it within the company in order to remain competitive.

Bye-bye, Excel! Advantages of automated liquidity planning

A bulky Excel spreadsheet, endless rows filled with small-scale items. A column for each month, a new spreadsheet for each year. Many numbers, little overview – and what did that complicated formula stand for again? Do you know this feeling?

In the ideal case, this semi-automated Excel construction is a well-maintained and preferably up-to-date liquidity plan. In the worst case, individual items are missing because the colleague from the marketing department, who is responsible for the budget, is currently on vacation. Perhaps a wrong digit crept in between two phone calls, while maintaining the table. Maybe one colleague has overwritten the entries of another. Small mistakes, which can have a big impact. Liquidity planning should ensure the economic existence of a company through clear information on liquid funds and early assessment of risks – and not lead to wrong conclusions.

Such (very human) mistakes can be avoided if you switch from the traditional Excel spreadsheet to a liquidity management software that not only clearly depicts your current liquidity, but also creates transparency about income and expenses without much effort – for all budget managers of the team, as well as for decision makers.

Compare your forecast with different scenarios

What are the advantages of liquidity planning via finway software compared to Excel?

  • All important data can be viewed by all colleagues – there is no need to exchange, download and re-upload Excel spreadsheets and different file versions, and there are no errors in the Excel formulas or in the transfer of data.
  • Your cash flow is available in real time through the connection and consolidation of your bank accounts and is visualized in an intuitive dashboard using charts and KPIs – your liquidity can be clearly mapped regardless of your industry
  • With our liquidity planning tool, manual data entry, multiple visits to different online banking pages and complex cash flow categorizations are no longer necessary – so you and your colleagues have more time for the strategic management of your company.
  • In the tool, you can see at one glance where liquidity bottlenecks are imminent. A scenario manager, which requires complex configuration in Excel, can be set up intuitively and easily via the tool, taking your KPIs into account. You can run through different scenarios and compare them directly with each other and with your current status.

With finway’s smart liquidity planning tool, you can see the important numbers at any time in real time, so you know exactly where your company currently stands. We help you to get the most out of your liquidity plan and thus enable you to make the best financial decisions for your company.

COMING IN EARLY 2022

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