Liquidity planning

The regulations in the German Corporate Stabilization and Restructuring Act (StaRUG) explicitly incorporates the duty of early crisis detection and management as core task of corporate management. According to Section 1 (1) StaRUG, the management of a legal entity with limited liability is obliged to continuously monitor developments that could jeopardize the continued existence of its company. Liquidity planning is one of the key instruments here.

There are two approaches of liquidity planning: direct liquidity planning and indirect liquidity planning.

In direct liquidity planning, cash inflows and outflows are planned directly and compared. The resulting change in liquidity is called net cash flow. A positive net cash flow leads to an increase in cash on hand or a reduction in debt. Direct liquidity planning is usually planned on a weekly basis. The forecast period is short-term and usually covers 13 weeks to 26 weeks.

In indirect liquidity planning, the cash flow is derived indirectly from the income statement and balance sheet (see also Integrated Business Planning). The change in liquidity is therefore derived indirectly from the business plan. Indirect liquidity planning is usually based on a monthly basis and covers a forecast period of 18-24 months or corresponds to the company’s mid-term planning period.

Due to requirements in the insolvency law, the creation of a direct 13-week liquidity plan is a standard to monitor the short-term liquidity development.

The 13-week liquidity planning is the basis for the company to analyze its short term-liquidity situation and creates transparency whether the company is fully financed in the short-term, whether there is a temporary liquidity gap or whether the company is even at risk of becoming insolvent. In case of a shortage, it will be the basis to develop needed liquidity measures. The 13-week plan is therefore the most important management tool for a company’s management in a crisis situation. As the management can very quickly be held liable for delaying insolvency (personal liability of the managing director under Section 826 of the German Civil Code (BGB) for delaying insolvency), the 13-week liquidity plan should be key focus in a crisis. And the transparency on the current status of cash and cash equivalents is also important for all other stakeholders, e.g. banks and shareholders.

Indirect liquidity planning is part of integrated business planning, which forms the basis for the preparation of restructuring reports (e.g. independent business reviews, going concern analysis) during the restructuring process.

Due to the regulations on crisis detection (early warning indicators for earnings and the financial situation) of the StaRUG the indirect liquidity planning with a planning horizon of 18 to 24 months has gained importance. It is therefore no longer just part of annual mid-term planning, but should be updated at regular intervals depending on the situation (sector, size, stage of crisis) and a plan/actual variance analysis should be prepared.

At first glance, accurately forecasting cash flows does not seem overly complicated. But due its impact it should not be underestimated. It requires a deep financial understanding, experience and the right instinct to create a direct liquidity plan. Before be develop any direct liquidity planning, we create a liquidity status. This overview is a comparison of the existing funds and credit lines and due liabilities as starting point to assess the current situation (sufficient funds, tight situation or existing gap). We then work with the accounting, controlling and management departments to derive a realistic liquidity forecast for the next 13 weeks. The processing of outstanding debtors and creditors is an essential part of this. As most debtors and creditors have a payment term of around 4-8 weeks, it is easy to forecast these payment flows. It becomes more difficult with future cashflows in the remaining 13-week liquidity planning period. In addition to debtors and creditors, liquidity planning also includes the development of loans, taxes, investments, advance payments, purchasing, fixed assets, production, deliveries, trade credit insurers and claim management.

All TMP partners have successfully implemented cash planning tools and processes and monitored the development in various projects. Based on your demand we can act as sparrings partner or coach to review and optimize the planning tools and reports. Or we can take over the full workstream “cash management” beginning from the set-up of planning tool, monitoring the development and reporting.

We are particularly experienced to support in tight cash situations. In such a situation, it is important to remain calm and to analyze precisely and thoroughly and draw appropriate conclusions. We can support you to identify and implement counter-measure, e.g. set-up of a Cash-Office / support in negotiations with vendors and customers. We are your partner to guide and support you in the liquidity management.