Liquidity: ongoing monitoring and rolling planning

What good is the best plan if it has been filed away neatly on the drive and is dozing away there? To use a plan efficiently, it has to be monitored continuously (controlling) and revised as well (rolling planning). This applies in particular when your company is growing and you are planning to move into new areas (products, customers, sales channels, etc.).

Financial plan vs. liquidity plan

We are entrepreneurs and we love pragmatic and simple solutions. That is why this is not going to be a theoretical treatise either. (Even Wikipedia has its problems here and treats the two as the same thing, true: Wikipedia). But: while a financial plan, as we see it, is mainly aimed at external recipients, the liquidity plan is a must-have for entrepreneurs. “Because without cash, companies fail.”

Controlling

Weekly or monthly controlling allows you to spot deviations in good time and gives you time to react. Two main areas need to be considered: incoming and outgoing payments.

The reasons for deviations between actual incoming and outgoing payments always follow the same pattern.

• Is it a “real” deviation or merely a shift in timing of the incoming payment compared with the planning assumption
• In the case of a real deviation, a short analysis of the reasons for the shortfall should be carried out – e.g. lower sales volumes, underperforming products, overly ambitious assumptions or delayed implementation – ideally directly with the person responsible

Analysing these deviations helps you to set future budgets more precisely and also enables you to take action where needed. Above all in combination with a …

Rolling liquidity planning (or cash flow planning)

By using rolling planning you can continuously monitor the targets you originally set and – on the basis of facts – revise them where necessary. What sounds so simple now (and is absolutely necessary) is in practice genuinely laborious to create, and above all to maintain and keep up to date. (Shameless plug: one of the reasons we developed COMMITLY.)

In our view, two points need to be observed here. Liquidity planning must always be kept up to date, and no budgets may be “forgotten”.

You achieve a permanently up-to-date plan by assigning an employee who regularly monitors the bank accounts and consolidates them in a planning tool of some kind. Whether in Excel or in your ERP system. While another approach some people choose is “I have a feeling for it”, we STRONGLY advise against that route. The most important point against it: should something go wrong after all, as a managing director you are quickly in the territory of “gross negligence” and therefore of delayed filing for insolvency (= criminal law).

And what is this about forgetting budgets?

You have planned revenue of 10,000 in a month, but only 8,000 comes in. The employee responsible assures you that the 2,000 will arrive at a later date. In a simple target/actual comparison, that information is a comment. In rolling planning, the future budget has to be adjusted by the 2,000. This applies not only to incoming payments but to an even greater degree to outgoing payments. Since liquidity planning should always be kept rather conservative, positive deviations in payments should, in case of doubt, be carried forward to the following months. In other words, it is assumed that the costs “saved” in that month will still arrive at a later point.

Ideally these costs do not arise after all and you have built up a liquidity reserve. And nothing is more pleasant than having a small buffer!

Credits: Photo by Franz Harvin Aceituna on Unsplash