The Liquidity Planning In the Business Plan – The 5 Biggest Dangers for Founders

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As a founder, you must make sure that you remain liquid. How to do that, I explain to you in this post.

The liquidity planning in your business plan provides an overview of how your balance develops in the first few years after the foundation. She’s putting your deposits in line with your payouts.

The liquidity plan is extremely important for your startup, even more important than profitability. Reason enough to take a closer look at this topic today.

What is liquidity?

 What is liquidity?

Those who are liquid are liquid. So he has enough money to pay all his receivables. It does not matter where this money comes from: Whether it was earned, borrowed or won in a raffle, it does not matter for liquidity planning.

In that it differs from the profitability . The profitability curve in your business plan describes your profits, that is, what’s left over when you deduct your expenses from your earnings. The liquidity curve describes the actual filling level of your wallet or account.

Ideally, both curves are pointing upwards – but in reality this does not have to be the case: a company can be liquid at the same time, but not (yet) profitable, or vice versa profitable, but not liquid.

What is the liquidity planning?

 What is the liquidity planning?

The chapter on liquidity planning in your business plan somehow describes your bank statement of the future. You look ahead to see how much money is in your account in 6, 12 or 24 months at the key date. You could also rename this chapter to “How is our account balance developing?”, Just as the founders of a web application did, whose business plan you, as a user of Catherine Morland, can read and take as a role model.

Screenshot from Catherine Morland, account balance development

Own chapter for liquidity planning in the business plan: How is our account balance developing?

Of course, to predict your balance, you need to know your future cash flows. Payouts include, among other things, purchases of goods and materials, personnel costs, insurance, operating costs, private withdrawals (ie your entrepreneurial salaries), taxes and repayment installments on your loans. Deposits include your sales, but also your equity or loans.

While the payouts can be determined quite well with a little research and planning, it is already difficult for the deposits, especially in terms of your sales . After all, you have no empirical values ​​that you can fall back on. You have no choice but to estimate your future revenues as well as possible by thorough analysis of market, competition and target group. The better you succeed, the better your liquidity planning will be.

If it shows that there is a gap and one day there is low tide in your account, you must try to fill that gap. There are various possibilities for this, such as loans, promotional loans or grants (such as the start-up grant or the start-up allowance).

Why is the liquidity planning so important in starting up?

 Why is the liquidity planning so important in starting up?

Sound liquidity planning is the prerequisite for your business success. Imagine, you suddenly run out of money and you can no longer pay your employees or no new goods to order! Then your company threatens to go out and it will not do you any good that your business is actually starting and your order books are full.

Because we know how difficult many founders are doing with the liquidity plan, we have developed a tool that automatically generates a liquidity preview based on your revenue and expense information. So save yourself the time you need to craft a suitable Excel spreadsheet and get into the content planning of your startup.

If the result should be a steeply sloping curve, stay relaxed: this is normal. Those who are self-employed often have high expenses at first, while sales are still slow in coming.

The same happened to Stefan Schulze Dieckhoff and Stefan Clauss , who wanted to start their own business some years ago with the production of an inflatable tent. Your liquidity planning looked like this at the time:


Automatic presentation of liquidity development based on the numbers entered in Catherine Morland.

As you can see, there were two long years before the two founders, in which their financial buffer was almost continuously melted down. The decisive factor was that the zero point was never exceeded and in March 2013 the decline was finally stopped. These two aspects ultimately led to the implementation of the project.

A decision that the intrepid founders have not regretted. Today her company Heimplanet has long been established and is in the black. Incidentally, you will also find her business plan alongside almost 30 other real plans at Catherine Morland as a role model and source of inspiration for your own business plan.

There are dangers for your liquidity here

Why it’s important to keep an eye on your company’s profitability and liquidity planning is explained in a few typical pitfalls that threaten your solvency:

1. Investments

It is also relatively easy for non-professionals to understand that investments are affecting your liquidity reserves. And immediately and 100 percent. Here you recognize again a difference between liquidity and profitability plan. Investments are only piecemeal on the latter because they are written off for tax purposes over a longer period of time, usually over four years. This means that each quarter, one quarter of the investment is deducted from your profit and your tax burden is diminished accordingly. Of course, your money already goes from your account in the first year and in one fell swoop.

2. Orders

I beg your pardon? Orders are a fine thing – why should they be bad for the liquidity plan? Because orders often cause first costs, which are only recorded at a much later date. Depending on the agreement, there may be several weeks or even months between placing the order and receiving the payment.

Let’s go through this with an example: carpenter Müller is commissioned to build a cabinet. He orders the wood and pays a co-worker to make the cupboard – both reduce his balance. The money from the customer but he gets only two weeks after the finished cabinet delivered and the bill was made. Therefore, our carpenter should arrange with his customer a deposit of at least 50 percent when placing the order and write the bill immediately after the order has been completed to prevent him from overpaying. Unfortunately, far too few entrepreneurs go this route because they pay too little attention to their liquidity planning.

3. Growth

Point 2 is followed by point 3: Rapid growth can become a problem for a young company because it reinforces the effect described above: As the number of orders increases, so does the cost. What dramatic consequences this can have for a dynamically growing company is shown in our example plan for online trading . Kai Grimme, the founder of a flourishing deli trade, was unable to capitalize on his opportunities for years and had to delay his company’s growth because his bank financing was not enough to accelerate growth, according to liquidity planning. In his case, that meant he could not meet the growing demand because he had no money to maintain larger warehouses.

The risk of becoming insolvent as a result of rapid growth is particularly high for companies that start self-financing, so they spend their money exclusively on their profits right from the start. Therefore, do not worry too much about financing and ensure that there is sufficient buffer so that financial bottlenecks do not later become a drag on your company’s development.

4. The tax

Many founders fall just then in a liquidity trap when it first goes uphill economically. As soon as they have passed the difficult start-up phase, they often have to pay such a large sum to the tax office in one fell swoop that the situation can literally threaten their existence. This tax effect is particularly dramatic for freelancers and partnerships, as they can later file their tax returns as corporations.

Again, an example helps us to understand the connections better: A graphic artist, let’s call him Thomas, is self-employed as a freelancer. For the first two years, he has little income. Accordingly low is the tax, which he must pay to the tax office. But in the third year, the train is picking up speed: the clients give themselves the handle in the hand, the revenue gush – but the tax officials do not know anything about it. With so much to do, Thomas will not file his tax return for 2017 (the first economically successful year since it was founded) until May 2018. As he holds his tax bill weeks later, he gets a big scare: The Office demands a five-digit sum from him:

  1. The tax arrears for the year 2017, in which his income was significantly higher than in the two years before.
  2. The additional tax payment for the first months of the current year, for which the too low rate was also applied.
  3. A now applicable, adjusted up tax advance payment for the current month (and all subsequent months).

If Thomas has failed to pay the tax due, it may now become very, very close for him – though or just because the hoped-for economic success has finally set in.

5. Wrong priorities

Unfortunately, it often happens that founders set the wrong priorities right from the start. They spend their money on things that are not necessary for the growth of their business – and then realize that they can no longer afford the really important purchases for their business. To make sure that does not happen to you, ask yourself before any investment decision, whether it is essential for the start of operations or just “nice to have”.

At the top of your list should always be the official guidelines, if they exist for your foundation. For example, if the health department requires you to have some equipment or equipment in the premises, you should use your seed capital to meet those requirements – otherwise the bureau may shut you down before you even start.

What follows? Tips for founders

The examples show that it is imperative to plan your liquidity carefully and to provide sufficient buffer, even in the event that your business starts faster than you thought, and you need more money to pre-finance raw materials, goods or services.

You should always make investment decisions with a view to the current company development: What investment is necessary for the start or the growth – and which can be postponed to a later date, if you have more money in the account again? How do you make depreciation most sensible, so when is the best time to activate certain cost items and thereby reduce your tax burden? Questions like these should be clarified best with your tax adviser.

In any case, remember to pay enough money in case tax back payments are expected. Under no circumstances should you spend this money for the summer vacation or the new company car. It’s not yours, even if it’s in your account.

And last but not least, be prepared that the liquidity planning you describe in your business plan is only the beginning. She will accompany you throughout your entrepreneurial life. If you compare and plan your planned and actual payments and deposits on your account every month, your liquidity forecast will become more and more realistic and your company’s foundation more stable.