Keeping an Eye on Liquidity Planning

Beate Haumesser
Beate Haumesser

Beate Haumesser is a member of the BELLIN Presales Team. She joined the company in 2015. Previously, Beate worked as Head of Corporate Treasury in a medium-sized German company. She trained as a banker und headed a branch before going on to study Business Administration at Mannheim University with a focus on finance and HR.

Read time: 3 mins
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You might think that liquidity planning is reserved for large companies. You’d be wrong. Whether you are a start-up, a small company experiencing growth, or a mid-sized business looking to innovate, securing financing and interacting with lenders could be in your future. If you haven’t had to bother with liquidity planning before, you will at this stage.

Why do I need a liquidity plan?

Effective liquidity planning is essential to successfully manage a company. It provides a structured view of key incoming and outgoing cash flows at the company, normally over a period of between one and three years. A distinction is made between a liquidity plan drawn up for a fiscal year that is set in stone, and a rolling liquidity plan that is periodically adjusted to reflect the latest developments. A rolling plan is used to record changes that, for example, can arise over time from sales and cost variances for the planning period. Annual and rolling plans are ultimately compared with actual cash flows with the aim of analyzing differences and taking measures to safeguard liquidity.

What is the purpose of liquidity planning? Besides the obvious answer that it offers projections for the coming months and years, there are other good reasons for liquidity planning.

Basis for sound company decisions by management

One of the duties of a managing director is to keep a constant eye not only on the financial growth of the company but also on its solvency. A structured liquidity plan provides an excellent foundation in this respect and also supplies reliable figures as the basis for every strategic decision.

Evidence for lenders and shareholders

Liquidity planning also plays a key role in the search for financing providers to make investments, fund growth or bring new product ideas to fruition. A liquidity plan can demonstrate to the bank how liquidity is expected to evolve over the years ahead – evidence which must be supplied time and again and which rolling planning can provide. Accurate planning underpins a company’s reputation in the eyes of all external parties – lenders and shareholders alike.

Why liquidity planning can be complicated

If you work in a finance department yourself and have dealt with liquidity planning in the past, you are probably all too familiar with the issues mentioned below.

You provide planning templates to all those involved but only incomplete information – or nothing at all – is returned. Entries are contradictory or contain a variety of units and formats. Prescribed exchange rates are not used, there is no coordination between operationally linked units, and so on. If instructions are too complex or requirements too onerous, entities are often overwhelmed and use the information incorrectly.

Several operational stumbling blocks quickly emerge.

If instructions are not fully adhered to and information is delivered in various ways, pulling together a plan is a tedious exercise. Data must be transferred manually, assumptions scrutinized, formats changed. A high degree of commitment is required if you want to keep to specified time frames and avoid the data you are working on being superseded by more recent data. Manual entries must also be checked by another person if errors are to be prevented. Delays are often anticipated and built into the schedule.

Processes are thus uncontrolled and inefficient, and all parties lose momentum. The result is often a liquidity plan based on data that is obsolete and ultimately unreliable.

How can I make my life easier when it comes to liquidity planning?

In the age of digitalization and globalization, one obvious answer to increasing efficiency and improving the underlying data is to use technology – ideally a company-wide platform to which all relevant employees have access and which provides reliable data in real-time.

But not all companies want to go down this path. Instead, small and medium-sized enterprises in particular would like to go one step further and eliminate repetitive, time-consuming tasks altogether.

Time to discover Coupa's range of treasury services.