Liquidity

Definition

The term liquidity is derived from the Latin word “liquidus” and stands for “liquid.” If you are “liquid”, you have more than sufficient liquid assets (e.g. Money in the business account or in cash) to settle your overdue obligations at any time, on time and without restriction. The liquidity, thus describes your ability to pay.

Lack of liquidity is one of the most common causes of insolvency in companies, because if you are unable to serve your current bills, even the prospect of future profit becomes worthless. If you are sloppy when planning liquidity, you risk a liquidity shortage – and that often happens without warning. The result is bankruptcy.

 

Importance for your Business Plan

Your financial section needs a sound liquidity plan. Your liquidity plan should showcase the interplay between of planned incoming and outgoing payments. This is where the liquidity plan differs from the profitability plan. Only the time of those payments is important for the profitability plan.

In your business plan, the liquidity plan usually has a timeframe of 3 years. The first year has to show precise information about the monthly liquidity.

 

SmartBusinessPlan Tips

  • Input your planned income and payments for every month. Keep updating them as your planning progresses.
  • Stay realistic when planning the revenue of your business. You will be making less revenue at the start. There will be stronger and weaker months as your business gains traction. Seasonal fluctuations can be the reason, for example. Plan ahead for losses and delays since it is not uncommon for customers to pay late or not at all.
  • Give special attention on the taxes you will have to pay: Log all positions with the corresponding taxes like VAT or sales tax. Be sure to inform yourself about payment dates at your tax office.
  • Calculate your tax burden and if you are unsure, get in contact with a tax advisor.

 

Do you want to know more?

Test it now, it’s free!