Running a successful business requires years of dedication and hard work. But even a profitable company can run into trouble if it doesn’t have enough cash on hand to pay bills, cover payroll, or handle sudden expenses. This is where liquidity planning comes in!
It is incredibly important for the financial well-being of a company. Here’s a closer look at liquidity planning, what it is, why it’s important, and how you can get started:
Understanding Liquidity
First off, what exactly is liquidity? It describes how easily or quickly an asset can be converted into cash without losing much of its value.
Look at it this way: The cash in your bank account is perfectly liquid because you can access it anytime. But assets like company vehicles, offices, and machinery are less liquid or illiquid because selling them takes time. Moreover, their price can drop if you need to sell fast.
What is Liquidity Planning
For businesses, liquidity planning is the process of forecasting cash inflows and outflows. It’s about making sure your business has enough cash on hand to meet its short-term obligations like paying suppliers or employees.
With robust liquidity planning, you’re never caught off guard. You can not only avoid cash shortfalls, but also forecast emergencies and prepare accordingly.
A liquidity planner can create a detailed plan to protect you from last-minute borrowing and unnecessary stress. This will continuously monitor your company’s current cash position and analyze historical and forecasted data to understand cash flow patterns.
Why Liquidity Planning Matters
Liquidity planning is more than just keeping a little extra cash for emergencies. Here are five reasons it is crucial:
Survival and stability. It will help your business cover essential expenses during difficult economic times.
Smooth operations. When you know your cash position ahead of time, you can pay vendors and employees on time, keeping operations running smoothly.
Seizing opportunities. Clear cash flow visibility can help businesses invest excess funds strategically so they don’t sit idle. You can seize profitable opportunities.
Smarter decision-making. Liquidity planning helps you spot when it’s safe to invest in new equipment or hire extra staff without risking day-to-day stability.
Financial discipline. Availing liquidity planning services from a reputable wealth management firm like Creative Planning is a sign of financial discipline. It can improve your chances of getting funded later on.
Steps to Successful Liquidity Planning
Don’t know where to begin? Follow these steps for successful liquidity planning:
Gather Data
Collect your most recent financial statements. This should include what you own (cash, receivables, inventory) and what you owe (bills, salaries, losses). Monitor your cash accounts and other liquid assets.
Forecast Cash Inflows and Outflows
Estimate the money coming in from different sources and the money going out for expenses.
Identify Liquidity Gaps
Pinpoint any periods or months where your projected outflows might exceed your inflows.
Implement Countermeasures
Consider funding options, such as credit lines, loans, or overdrafts.
Monitor and Update
Work with a professional liquidity planner to continuously monitor cash inflow and outflow. Update your plan as sales, costs, or market conditions change.
