Template: 13-week liquidity planning

Liquidity planning for startups: everything you need to know

Reliable liquidity planning forms the basis for ensuring a company's solvency. The aim of the analysis is to identify possible liquidity bottlenecks at an early stage and to be able to react accordingly. In practice, rolling, detailed liquidity planning over a period of 13 weeks has proven to be a useful tool for identifying potential insolvency at an early stage. This period is generally easy to plan and allows an adequate response time in the event of impending liquidity bottlenecks.

For planning purposes, you can use our comprehensive 13-week liquidity planning template.

What is liquidity planning?

In short, liquidity planning is the process of forecasting how much cash your business will need to meet its obligations. This includes things like payroll, rent, and other operating expenses. Liquidity planning is important because it gives you a clear picture of your company's short-term cash needs. This, in turn, helps you avoid nasty surprises.

Further stages of liquidity planning

When it comes to liquidity planning for startups, there are three different time horizons that can be considered: short-term, mid-term and long-term.

Short-term liquidity planning refers to the cash flow projection for the next 12 months. This is important to ensure that the startup has enough cash to cover operating costs and other short-term liabilities.

Mid-term liquidity planning refers to the cash flow forecast for the next 2-3 years. This timeframe is important because it gives the startup the opportunity to generate revenue and achieve profitability.

The long-term liquidity planning includes the cash flow forecast for 5 years or longer. This is important because it allows the startup to plan for future growth and expansion.

When creating a liquidity plan, it is important to use realistic assumptions and projections. The goal is to create a financial plan that gives the startup a clear understanding of its financial needs and how to meet them.

Why liquidity planning is important

There are a number of reasons why liquidity planning is so important for startups. First and foremost, it helps you avoid financial disaster in the event of an unexpected setback. For example, if your startup faces litigation or unexpected repairs, you'll need to have cash on hand to cover those costs. Without a liquidity plan, you may need to take out high-interest loans or even sell equity in your company to raise the necessary funds.

Unexpected expenses always pop up. No matter how well you think you've planned for your company's needs, something will always happen that you didn't expect. Whether it's an unplanned repair or a slow sales month, if you have extra cash on hand, you can be sure your business will weather any storm.

Another reason liquidity planning is so important is that it allows you to seize opportunities as they arise. If you have cash on hand, you can seize new opportunities quickly without having to wait for investor funding. This could make the difference between your startup being a success or failing.

Good liquidity planning can help you get better terms from lenders. If your business is seeking financing, lenders are much more likely to grant you favorable terms if they know you have a solid financial plan for managing your cash flow

Finally, liquidity planning gives you a sense of security.

Knowing that you have a financial plan in place to cover unexpected expenses helps relieve stress and allows you to focus on growing your business.

How to create a liquidity forecast

Now that we've answered the question "What is liquidity planning?" and "Why liquidity planning is important," let's look at how you can create a liquidity forecast for your own business. Here are a few tips:

Know your business cycle: The first step is to know your company's operating cycle, i.e., how long it takes for inventories to turn into cash. This will give you a good idea of how much working capital you need at any given time.

Review your historical financial statements: Take a look at your company's previous financial statements next. This will give you an idea of what your typical cash flow looks like and where any liquidity shortages might occur.

Use financial modeling tools: There are several financial modeling tools that can help you predict future cash flow based on past performance and current trends. These tools can be very helpful in predicting cash flow for your startup.
Make conservative estimates: When in doubt, be rather cautious when preparing your liquidity forecast. It is better to have too much cash on hand than too little!

As entrepreneurs, this gives you the focus on liquidity

As a startup, it's critical that you have a solid liquidity planning plan in place. Liquidity planning helps you avoid financial disasters and take advantage of new opportunities as they arise. Most importantly, it gives you the confidence that you are prepared for whatever comes your way.

What is a liquidity plan?

A liquidity plan is a document that outlines how a company will manage its short-term cash flow. The plan should include strategies for collecting receivables, controlling and cash receipts and expenditures, and accessing additional funding when needed. A cash flow plan is important because it can help a business avoid financial problems.

A good business liquidity plan should provide for deposits and disbursements that are reliable, independent, and compliant with regulations. To create financial stability and efficiency in business operations, cash flow should be monitored and managed as invoices come in and go out. Deposits should be available within timeframes that comply with internal regulations, while disbursements must be streamlined to minimize asset liquidation. A successful liquidity plan ensures timely deposits and balanced disbursements, resulting in stable working capital flow with minimized execution risk.

For whom is a liquidity plan suitable?

For any person or business, this plan can be critical to ensuring a stable future. A liquidity plan is useful for anyone who wants to have access to money for emergencies, manage cash flow and pay off debt in an organized way. It should also be considered as a way to avoid having too much savings tied up in investments that might take time to yield a return. If you anticipate a major income change (such as retirement), a liquidity plan can help manage monthly expenses during that time. In summary, a workable liquidity plan can significantly reduce financial stress in the long run and provide peace of mind in both good times and bad.

Liquidity plan for self-employed

Being self-employed often means you have to manage and be responsible for your own finances, which can be quite a difficult task. A good rule of thumb is to keep cash as low as possible and as high as necessary. This means taking proactive steps to maximize working capital and keeping a good handle on business expenses. Keeping cash low frees up funds that can then be used for other areas such as investments, small business loans, or just cash reserves. Paying attention to cash levels is ultimately key for any self-employed person who wants to successfully manage their finances and achieve their long-term goals.

A liquidity plan as a controlling instrument for your company

Cash is the lifeblood of any business, and it's important to have a solid cash management system in place to ensure your business stays afloat. A cash plan is a good way to keep track of your company's finances, liquidity development and cash flows, and it can also be used as a controlling tool to prevent cash flow problems.

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