Planning the company’s liquidity is essential to survive!
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The right data and information has to be generated from your accounting to prepare your liquidity plan in a way that allows the necessary and correct decisions.
The SME portal of the Swiss federation identifies Liquidity squeezes as the number one reason for bankruptcy with SME’s. Nine out of ten SME companies go bankrupt due to lack of liquid funds. This shows that neither accounting nor the balance sheet or the profit and loss statement are crucial for survival, but the planning and steering of the liquid funds.
Often a lot of attention is given to the profit and loss statement. It is always nice to have huge turnovers and a nice bottom line, but this does not mean that enough liquidity is generated to pay salaries, social security, VAT and other expenses that are due on a regular basis. Profit is not liquidity and in most cases these two parameters do not show a parallel development. Profit generating turnover usually becomes liquidity with a certain time lag.
Deliveries of goods and the execution of services have to be billed in a timely manner, because not only the elapsed time until the invoice is issued but also the agreed upon terms of payment slow down the inflow of liquid funds. At the same time the fixed running costs (salaries, cost of goods etc.) have to be paid as they accrue. If invoicing and the management of the receivables are out of control, a wide and unpleasant gap can result quickly.
On one hand the plan shows, what outflows of liquid funds occur and when they occur. Often these outflows are defined rather clearly and can be planned easier than the inflows as they are fixed amount on a regular monthly basis (salaries, rents etc.). Inflow on the other hand depend on the factors shown above and can be further slowed down by the payment moral or payment difficulties of clients. The plan shows how much liquidity is needed at any given point in time and if this need will be covered by the planned inflows.
If the plan shows, that a shortage is possible, decisive measures have to be taken to avoid this situation. The can aim in three different directions.
The most effective measures are in most cases within the processes of the enterprise. If invoicing is accelerated and invoices are issued within the first few days after delivery instead of being issued after 30 to 40 days this has a massive impact on liquidity. The same effect results if the terms of payment are shortened. At the same time the accounts receivables accounting is very important. A prompt and strict dunning process, written and on the phone, might be uncomfortable but in many cases, works miracles to recover cash. Another instrument a prepayments or payments on accounts, which may be suitable from a certain size of contract or for new customers, whose payment habits are unknown. An outsourcing of receivables management and factoring are further instruments, which might help to recover cash faster.
The most effective measure and at the same time the one with the least risk is the negotiation of longer payment terms. Furthermore, streamlining your production process and a reduction of your stocks help a lot and are usually a valid option. If this is not possible more risky measures such as delaying maintenance or not urgent replacement investments as well as leasing new equipment instead of buying it might be taken into consideration.
The first step is to check if all machinery and equipment are still needed. If not, such item can be sold to get liquid funds into the bank account. Under certain circumstances “sale and lease back” might also an effective tool.
If possible, long term debts can be raised or new funds from shareholders (loans or equity) can be obtained.
If you are in funds privately, those can be used to bridge such bottlenecks by giving loans to the company or by reducing or stopping your regular income.
Liquid funds have to be planned cautiously. Only inflows which will be received with great certainty are to be put into the plan. The main reason is that the outflows are more certain and clearly defined and happening. If the planning is handled in such way a bottleneck can be detected early on and measures can be taken well ahead of a possible critical situation to match in- and outflows again.
Your liquidity plan has to suit the individual situation of your firm. It must be quick, easy to handle and designed to match. Holger Wanke is ready to provide information or help you along.
