A liquidity plan is used by companies to determine whether they will have enough liquidity in the near future to be able to pay their invoices and to cover any other liabilities in time. Or, to put it another way: a company can tell from a liquidity plan whether they will stay solvent. This calculation is based on expected income and expenses. But what if things don’t go according to plan? In the likely event of this happening, we advise you to base your liquidity planning on IF-THEN scenarios and to think of alternatives. Here’s what to do:

Step 1: Draw up a basic liquidity plan

For basic liquidity planning, compare your expected income with your expected expenditure – based on your current liquidity at the time X – on a timeline (e.g. for each month in a given year), taking into account your investment and financing activities. This will allow you to see if you will have any excess liquidity or liquidity shortfalls over time. When drawing up your liquidity plan, try and come up with predicted income and expenditure figures that are as realistic as possible based on facts or your own experience.

Your expected income will include the following:

• Cash income, customer invoices
• Credit
• Interest
• Tax refunds

Your expected expenditure will include:

• Rent
• Cost of materials
• Salary payments and social security costs
• Insurance
• General expenditure
• Marketing
• Consulting fees
• Loan repayments

Step 2: Come up with scenarios when drawing up your liquidity plan

Things don’t always go according to plan. Income you are expecting may not come in, and by the same token, unbudgeted expenditure may also arise. This is why the next thing you should do is think about where your company is most at risk of encountering an unforeseen liquidity shortfall. These four examples will help illustrate the point:

Scenario 1: Delivery bottleneck involving your main supplier

What if your main supplier is suddenly no longer able to deliver, meaning you have to find a new supplier, but this supplier charges much higher prices to deliver?

Scenario 2: Delayed payment from an important customer

What if your most valuable customer is suddenly no longer able to pay their invoices at the normal agreed time because they themselves have encountered a liquidity shortfall?

Scenario 3: Higher acquisition cost due to currency fluctuations

What if you suddenly find yourself having to pay a lot more for a new piece of equipment you bought from the USA than anticipated due to currency fluctuations between the time of ordering and the time of shipment?

Scenario 4: Increase in revenue

What if you acquire a new customer overnight who can add 25% to your total revenue? What impact would this have on your expenditure if this means you need to buy a new piece of equipment?

Examine each of these scenarios carefully in turn and analyse the effects each one might have.

Step 3: Come up with a plan B

If you discover that a particular scenario will have an unwanted impact on your liquidity, you will need a plan B. Think about how you could manage your liquidity in the event of one of these scenarios actually happening, e.g.

Delivery bottleneck involving your main supplier

Distribute your cluster risk early on so that you have alternative options in an emergency.

A higher purchase price due to currency fluctuations

Cover yourself against currency-related risks early on.

Delayed payment from an important customer

Offset late payments with early payments from other customers and remind them about payment deadlines.

Increased revenue

Look for a production partner who can help you handle extra production so that you do not need to buy a new piece of equipment.