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The aim of liquidity planning is to protect companies from becoming insolvent. These five expert tips will help you to monitor cash inflows and outflows proactively and manage liquidity in a timely manner.
Forward-looking liquidity planning helps SMEs to avoid financial difficulties even when business is running smoothly.
How can you forecast future cash flows and plan liquidity? Coordinating cash inflows and outflows is an important task that allows companies to make sure that they always have sufficient financial flexibility. This requires careful, constantly updated liquidity planning.
Active liquidity management ensures that potential shortages are identified early on. Nine out of ten companies fail at this task; they end up going bankrupt due to insufficient cash flow. Comprehensive liquidity management, including liquidity control, not only reduces this risk, but also helps ensure that the company makes the best possible use of its financial resources.
Liquidity planning is based on the company’s goals and vision, which serve as a compass. This helps business owners to make the right decisions based on their specific circumstances, identify short-term liquidity gaps or plan investments. Follow these five tips to stay in control.
Accurate, up-to-date liquidity planning is essential in day-to-day business operations. It is one of the main tools for ensuring solvency.
Managing liquidity means taking into account cash inflows and outflows from day-to-day operations, as well as the funds required for investments or capital repayments. Depending on the size and complexity of the business, simple Excel spreadsheets or specialized software solutions can be used to ensure that liquidity planning remains accurate and organized. The UBS liquidity plan template is an example of a suitable Excel tool. Whether you choose this template or opt for other tools and liquidity management techniques for your forecast, you should also consult external experts to obtain a second opinion if possible.
Online banking is an important tool for planning and particularly for monitoring liquidity. It provides SMEs with an up-to-date overview of past account activity and shows the current status of all accounts. In addition, many online banking solutions feature a balance preview that displays upcoming transactions. They also indicate credit limits, specifying the amount still available. This gives you updated data on an ongoing basis that you can incorporate into your liquidity overview.
UBS has integrated bexio – the first external business software – into its E-Banking platform, which is very easy for self-employed individuals, small businesses and start-ups to use. Thanks to automatic data synchronization, the program also displays up-to-date accounting data in the “Liquidity Cockpit”. At UBS, we go one step further: if you have accounts at multiple banks, the Multibanking solution allows you to keep track of your accounts at third-party banks in the same place as your UBS accounts.
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Part of liquidity management involves optimizing payment collection and accounts receivable. Accounts receivable are customers who owe money to your company. There are three strategies companies can use to reduce their liquidity risk:
Compared to accounts receivable management, accounts payable management is easier to handle as part of liquidity planning. This is because every company has more control over when it makes payments than over when it receives them. You have three options for managing liquidity through your supplier relationships:
Insufficient liquidity is a risk for any SME. However, many business owners also view surplus liquidity as a problem, for example when interest rates are unfavorable and liquid funds are eroded by negative interest rates. Nevertheless, surplus liquidity also represents an opportunity to make replacement or infrastructure investments for the company, to pay dividends, or – if the entrepreneur’s personal assets are tied up in the business – to make plans for their appropriate management.
How much cash should be kept in the company to ensure operational flexibility and financial security, and how much should be used up? The answer is largely based on liquidity planning: the company should retain exactly what it needs from an operational and strategic point of view. While operational liquidity covers regular expenses, strategic liquidity is intended for medium-term strategic purposes, such as financing market expansion or replacement investments. Anything beyond that is regarded as surplus liquidity, i.e. funds that are not needed for day-to-day operations or earmarked for strategic purposes. This money should be distributed or invested, partly to reduce the company’s liability and tax burden. Liquidity reserves can also be built up, depending on the company’s need for financial safety buffers.
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Many SMEs safeguard their liquidity based on key financial indicators. They distinguish between different types of liquidity.
It’s worth planning your SME’s liquidity properly:
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