Meaning of Liquidity Forecast

By | June 3, 2021

Can the current bills be paid in the next three to six months for insurance, taxes, rent, telephone etc? A liquidity forecast always gives a precise overview, because all planned and expected monthly income and expenses are recorded in it.

The difference between the expected income and expenditure then results in the monthly surplus – the surplus – which is available to pay the bills. If there is a shortfall – a shortfall – then it should be ensured as early as possible that “money is in the till” or is flowing into it.

The funds available per month:

  • Cash and cash equivalents in the cash register and bank.
  • Incoming payments (sales, other income, private deposits) including VAT

The monthly expenses:

  • Outgoing payments
  • Wages, salaries.
  • Social security contributions
  • Delivery
  • Cash purchases
  • marketing
  • distribution
  • Investments
  • Lending rates
  • Loan repayment
  • Rent, utilities.
  • VAT / sales tax
  • Insurance
  • Private withdrawals
  • Other expenses

+/- surplus / shortfall from the previous month

So far, that means that liquidity is a predictable quantity, but entrepreneurs in particular have the problem in their start-up phase that they were able to finance the initial investments, but then the money for ongoing business is not available. At that moment it is difficult for the entrepreneur to pay for material, goods or rent on time – the result: reminders and reminder fees and interest. The liquidity of the entrepreneur, which is already ailing anyway, is then additionally burdened by these expenses.

Planning the liquidity

Every entrepreneur can, through perfect planning of his solvency, decide for the future whether there is a need for capital or whether he has sufficient liquid funds available. However, in liquidity planning, only the inpayments and payments made by the company are taken into account, as described above, and the accounting aspects such as expenses and income are not taken into account. The focus of the liquidity forecast is mainly on the cash inflows and outflows that occur via the business account or the cash desk. The calculation that arises from the liquidity forecast is known as the liquidity calculation and is an essential point in the business plan of every entrepreneur.

A company’s liquidity

According to theinternetfaqs, liquidity represents the solvency of a company and thus the ability to settle all liabilities. The entrepreneur does not receive the liquidity purely by chance, but has to plan and control it. In order for this to work, it is necessary to determine the future deposits and withdrawals as precisely as possible and this data must then be sorted according to the respective due date.

With a liquidity forecast and a liquidity calculation it is possible to plan the liquidity for a period of 12 months. In the liquidity forecast, the company’s actual inflows and outflows are recorded regardless of the commercial or tax law background. An analysis of future costs is also necessary, such as the costs incurred for a production project. In addition, the annual insurance premiums or interest charges should not be forgotten when planning.

In the liquidity forecast or in the liquidity calculation and planning, an essential factor is the monitoring of the payment terms . This means that the company, in its liquidity planning, takes into account the payment terms that have been granted to it, as well as the allowances granted by it. Only then is it possible to correctly record incoming and outgoing payments. It is important for a start-up that he does not forget the sales tax and input tax when planning liquidity , because these also flow to or from the company and thus influence the liquidity.

How can the liquidity trap be avoided?

Payment behavior is falling in Germany and therefore it is not easy for an entrepreneur to improve his liquidity, especially when it comes to setting up a business. The entrepreneur should check the liquidity of his business partner in advance before entering into a business with him. This income can be made through the house bank or through so-called debt collection companies. If you want to increase the willingness of your customers to pay, you can grant a discount and a correct payment term should always be noted on the invoice. In addition, it is important to regularly monitor incoming and outgoing payments, because this is just as much a part of liquidity planning as setting up a functioning dunning system.

Check the liquidity

In order to be able to check the liquidity of his company, it is necessary to calculate degrees of liquidity. These are divided into three levels. The degree of liquidity can be determined as follows, whereby the short-term liabilities in this example represent all debts of the company with a term of up to one year.

1st degree liquidity:

Cash and cash equivalents (bank, cash register): short-term liabilities x 100%

Here the figure should be 30 to 50%, because in the best case half of the short-term liabilities can be covered by the cash or bank balance.

2nd degree liquidity:

Cash + short-term receivables: Short-term liabilities x 100%

This value should be well above 100%, because in addition to cash, your own claims are also taken into account.

3rd degree liquidity:

Total current assets: short-term liabilities x 100%

The value of the last degree of liquidity should be over 200%, but this only makes sense for companies that have inventories.

The entrepreneur can use the liquidity levels to determine whether the liquidity of his company is sufficient or in need of improvement.

Liquidity Forecast