Liquidity planning in times of corona: Challenges and solutions

LucaNet AG, |Corona
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Be it a large multinational corporation, a medium-sized company, or a family-run business: In some way, everyone is currently feeling the effects of the coronavirus and the ensuing shutdown. No matter how great the differences are between the various companies, they all ask the same essential questions:

  • How and when will things get back to normal?
  • What are the long-term consequences of the coronavirus pandemic?
  • How do I ensure that I retain my own solvency?

This is where reliable and meaningful financial planning comes into play. An important component of this is liquidity planning. Find out in this article why liquidity planning is so important, what mistakes one should avoid during liquidity planning, and whether such planning processes should really be carried out with a software such as Excel.

Liquidity planning: Why it is so important for companies

It is there in the word. The objective of liquidity planning is all about maintaining the liquidity of a company. This is achieved by taking timely action to prevent insolvency and ultimately bankruptcy.

This involves recording all expected cash flows within a certain period in order to determine company liquidity during such a period. The challenge in crises, especially in times of the coronavirus crisis, is that planned inflows from existing receivables or planned sales revenues may get delayed or even be cancelled entirely, which, in turn, has a considerable impact on the liquidity of a company.  

3 challenges for companies when it comes to liquidity planning

  1. Perhaps the greatest challenge when it comes to liquidity planning in companies is the allocation of expected cash flows to the appropriate planning period. Particularly in times of economic turbulence such as the coronavirus crisis, the actual behaviour of cash inflows can deviate significantly from the behaviour of planned inflows and outflows. This, of course, makes it more difficult to make the right planning assumptions.
  2. Recording all cash flows is also a challenge for liquidity planning, as both balance sheet and off-balance sheet effects must also be taken into account.
  3. A company that expects a shortfall in liquidity at a certain point in time must take appropriate countermeasures in a timely fashion. It all comes down to the question: What can precisely be done to ensure company liquidity?

Typical mistakes during liquidity planning

Even though a careless attitude to liquidity planning may have been able to be shrugged off in economically healthy times, it may certainly come back to bite as the effects of Covid-19 start to set in. The following mistakes should therefore be avoided at all costs:

  1. Expecting cash inflows from revenues either too early or overestimating them.
  2. Not keeping track of unplanned outflows from previous years (e.g. back taxes or tax audits).
  3. Creating a liquidity plan only once without carrying out adjustments during the year.
  4. Only starting to create a liquidity plan when solvency issues are already a problem.

Liquidity planning in crisis mode

If financial bottlenecks are identified during the preparation of the liquidity plan, the most important thing to do is to involve your local bank and other investors. In addition, every company should quantify its greatest financial risks and derive an appropriate risk management strategy on the basis of these findings.

It is also helpful to draw up several (best case and worst case) scenarios for liquidity planning in order to be able to better assess the opportunities and risks of certain measures such as freezes in investment or for when short-time work allowances need to be accounted for.

But how do you cope with such a situation when you are suddenly affected by a slump in income and have to react quickly? Swiss LucaNet customer, ZVF-Unternehmungen, active in the food services industry, is in the middle of such a situation due to the outbreak of the coronavirus. Their acute crisis management can be broken down into the following points, where everything in the action plan is subordinate to the goal of shoring up short-term liquidity:

  • Daily management of cash inflows and outflows from operating, investment, and financing activities
  • Proactive communication with business partners – both customers and suppliers
  • Review of major investment projects and the decision as to their postponement or continuation
  • Securing of short-term financing by all available parties, making use of the (Swiss) federal government's loan guarantees

Advantages of liquidity planning software compared to Excel

For all intents and purposes, it is indeed possible to create liquidity plans with MS Excel. But it takes more time to do so than with planning software and in the end your figures are less reliable. With Excel, it does not take long before your figures start to take on a life of their own. You accidentally overwrite a formula just the once, numbers might have been typed in incorrectly, or a reference is off-kilter and all of the sudden, the validity of the entire plan is called into question. The feeling is excruciating – especially during a crisis like the coronavirus pandemic, when you are obliged to act under time pressure and figures need to leave no iota of doubt.

In this instance, planning software that enables integrated financial planning is clearly the better option. Planning software not only provides you with an overview of your liquidity and allows you to intervene in way to steer things in the right direction, but thanks to scenario planning, you are also prepared for any eventualities and times of crisis that may come about and have reliable financial plans at hand, should discussions with investors be on the cards. All of this in just a few minutes and with rock-solid results.

Take a look at how financial planning software from LucaNet helps you to maintain the liquidity of your company:

View liquidity planning software

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