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Liquidity Planning & Liquidity Management

Liquidity planning and liquidity management are regularly central components of restructuring processes. However, their use is not limited to crisis situations, but also serves to fulfil the management’s due diligence duties.

Goal of Liquidity Planning

The goal of liquidity planning is to determine the probable level of liquidity. The liquidity plan is understood as a controlling instrument for timely risk assessment. All cash flows expected in the planning period are recorded during preparation so that solvency can be analyzed and countermeasures can be taken for risks.

Liquidity planning is a central component of integrated financial planning, which includes income statement planning, including the preliminary planning required for this, and balance sheet planning as additional components. This ensures that the planned operational business development is incorporated into the liquidity planning. Within the framework of liquidity planning, this information is processed with regard to the time and amount of its payment effectiveness.

Liquidity planning is of great importance with regard to the determination or exclusion of actual or imminent insolvency. In practice, a three-stage approach has been established.

1. Liquidity Analysis by Reference Date

The first step is to create a financial status that shows the liquidity situation for the current reference date. For this purpose, the existing cash and cash equivalents must be compared to the due liabilities. Cash and cash equivalents also include credit lines not drawn on. Furthermore, deferred liabilities shall not be included in the financial status. If the due liabilities are not covered by cash and cash equivalents, it is necessary to analyze the time horizon in which the liquidity gap can be closed again.

2. Liquidity Planning on a Weekly Basis

Based on the financial status on the reference date, the second step is to plan future incoming and outgoing payments, which are expected in the near future. This usually involves an assignment to weeks. The expected incoming payments include incoming payments from existing receivables due as well as incoming payments resulting from planned sales revenue activities. Outgoing payments can result from due liabilities, but also from ongoing business operations. Investment measures and financing costs should also be included. Measures already planned to improve liquidity (e.g. deferrals of payments) can be taken into account if they are specified to a sufficient extent.

3. Liquidity Planning on a Monthly Basis

Liquidity planning is not only intended to check short-term solvency or to rule out insolvency. It also helps document that the company will be able to meet its obligations in the future and that there is no threat of insolvency. To this end, the planning horizon is usually extended for a period running until the end of the following fiscal year and a liquidity plan is prepared on a monthly basis. Compared to short-term planning, forecasting information flows into the planning calculation to a much greater extent. With regard to the significance of liquidity planning, it is particularly important to systematically link it with the planning for the income statement and balance sheet (integrated planning approach) and to draw up viable planning assumptions and document them in a comprehensible manner. 

Liquidity Management

The results of liquidity planning often serve as the basis for deriving measures. Temporary shortfalls can be countered with targeted liquidity-creating measures as part of structured liquidity management. This can include the management of accounts receivable, accounts payable and inventories, as well as the implementation of external financing measures.

We create transparency by preparing or validating liquidity planning, developing proposals for liquidity-creating measures and accompanying their implementation.

If you are interested or have any questions, please contact us.

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 Dr. Rainer Doll Partner