Liquidity planning refers to the forward-looking comparison of a company's expected cash inflows and outflows. It is used to assess future solvency and to identify potential liquidity surpluses or bottlenecks at an early stage.
What is cash flow forecasting?
Cash flow planning involves examining the available cash a company is expected to have at its disposal within a specific period and the payments it needs to make.
Crucial here is not only the amount of a receivable or liability, but in particular the time at which a payment is expected to be received or become due.
What components does a cash flow forecast consist of?
Liquidity planning typically takes into account:
- the available liquidity at the beginning of the planning period
- expected incoming payments
- expected cash outflows
- the due dates of the payments
- the resulting anticipated cash balance
Depending on the planning, additionally expected liquidity reserves or potential funding instruments can be taken into account.
Liquidity and company profit – what is the difference?
Cash flow forecasting looks at cash inflows and outflows and thus a company's solvency. It must therefore be distinguished from the income statement, which contrasts income and expenditure.
Revenues and cash inflows, or expenses and cash outflows, do not necessarily occur at the same time. A positive net income therefore does not automatically mean that sufficient liquid funds are available at all times.
What role do receivables and payables play?
Outstanding receivables can provide indications of future incoming payments. Outstanding payables, on the other hand, point to upcoming payment obligations.
Information from the Debtors ledger, the Accounts payable and to Outstanding items (OPOS) can therefore provide important foundations for cash flow forecasting.
Is liquidity planning a statutory requirement?
Cash flow forecasting is not a standalone statutory component of the annual financial statements and is not regulated in a uniformly prescribed form for every company.
However, certain companies have legal obligations regarding early crisis detection and the monitoring of developments that could jeopardise their continued existence. A forward-looking assessment of solvency can be of particular importance in this context.
