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.
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 time frame of 3 years. The first year has to show precise information about the monthly liquidity.