Liquidity planning

Liquidity planning and securing liquidity in times of crisis

When profits collapse in a crisis, companies can usually cope with and compensate for this for a while. However, a lack of liquidity can hardly be compensated.

If liquid funds become scarce, insolvency is imminent and the continued existence of the company is threatened.

This means that if there is no more liquidity and the credit line at the bank is also exhausted, the company loses its ability to pay. It can no longer meet its payment obligations - and must file for insolvency.

Avoid difficulties, identify liquidity bottlenecks early on

Especially in times of crisis, liquidity planning is therefore one of the cornerstones for companies to get through the crisis safely and remain capable of acting. In contrast to other key figures, liquidity reflects the actual room for maneuver during the crisis.

Keeping a constant eye on all cash flows in the company is indispensable, especially in times of crisis - ideally by monitoring them in real time. This is the only way to detect impending bottlenecks early on and to initiate countermeasures in good time.

Maintaining solvency includes, for example, continuously and closely monitoring all payment obligations and, if necessary, obtaining a deferral. It may also be possible to postpone investments for a while or reduce order quantities in order to maintain liquidity.

However, such liquidity protection can only be successful if current and harmonized data is available and forecasts of the development of liquidity are available at all times.

The larger and more interwoven companies are within a group, the more important it is to maintain an overview of a large amount of data from sometimes very different source systems.

In addition, it is often difficult to obtain current and relevant data from the multitude of systems and to merge them in a timely manner. This is the case, for example, when a group of companies works with different non-SAP or SAP ERP systems across different countries.

Sometimes, data in companies even has to be entered manually into programs such as Excel. This not only costs a lot of time; input errors often occur as well. Moreover, liquidity data is not available in real time.

Planning and securing liquidity - with SAP Central Finance

One application that supports central and global liquidity planning is SAP Central Finance.

Central Finance provides up-to-date and harmonized liquidity data in real time. Liquidity planning can thus be automated, errors occur less frequently and the accuracy of forecasts is improved.

To centralize the various financial systems (non-SAP or SAP) of a company, they are integrated into the Central Finance system. Subsequently, all financial and controlling postings are replicated in the central finance system via mapping structures.

Based on the key liquidity figures, this enables timely and reliable liquidity planning.

SAP Central Finance as a central system can also be used as an integrated cash management system. In this way, the data that is available in Central Finance in one way or another can be used for liquidity forecasting.

The KPI Dashboard: over 40 relevant key figures

Those who use SAP Central Finance also maintain an overview of other key figures - in addition to the liquidity figures - that are essential for professional financial planning in companies.

GAMBIT offers companies, for example, a KPI Dashboard which shows more than 40 of the most well-known key figures from the asset, financial and profit situation. These key figures can be retrieved in SAP Central Finance in real time.

How do companies arrive at a liquidity plan?

In principle, liquidity planning is carried out with the help of a liquidity plan. This plan compares all expected cash flows - i.e. incoming payments and outgoing payments - for a specific planning period.

A liquidity plan is a forecast. It provides companies with an overview of the planned, future course of cash and account balances. A liquidity plan therefore always provides information about the future development of cash flows.

The liquidity plan is based on data and figures from the company. For example, it contains data from the sales plan, the cost plan, the capital requirements plan or the investment plan.

Actual data available in the system is used for liquidity forecasts and refinement. These are for example purchase orders or sales orders.

The individual planning periods of the liquidity plan consist of time periods such as weeks, months or quarters. The total planning period usually does not exceed twelve months.

In times of scarce liquidity, shorter periods than months or quarters are also possible when drawing up the liquidity plan and planning the periods: in times of crisis, for example, it can make sense to plan on a weekly or, in exceptional cases, even daily basis in order to keep a close eye on liquidity.

Automation and real-time solutions such as SAP Central Finance also offer valuable support in this respect, because the data is available directly and does not have to be aggregated in a time-consuming process.

In principle, liquidity planning under SAP S/4HANA (1909 and on-premise) is part of SAP S/4HANA Finance, or more precisely the (Scope Item Group) Treasury Management component.

• This component contains the scope item "Extended cash transactions" (J78), which provides, among other things, an end-to-end view of the cash position and short- and medium-term cash forecasts.
• The component "Basic Cash Transactions" (BFB) provides information on the liquidity forecast.
• The scope item "liquidity planning" (3L5) in turn supports the long-term plan for liquidity development. Here, historical and actual data as well as data from the short and medium-term liquidity forecast flow together.

What types of liquidity planning are there?

A liquidity plan is prepared on a rolling basis. This means that it follows a period-oriented planning. Based on actual values, the plans are revised again and again. In this way, the following forecasts are improved because current data is incorporated into the planning.

The accuracy of planning is at its highest when it only affects the following period. On the other hand, it decreases the more the period under consideration lies in the future.

The reason for this is obvious: the amount of rent or redemption instalments to be paid is usually fixed over a longer period of time, but the amount of sales, profits or even material costs are not. If the uncertainty increases, however, the accuracy of the forecasts decreases.

Which factors flow into liquidity planning?

The recorded payments are divided into incoming and outgoing payments.

All cash flows are recorded, not just costs. For example, private withdrawals (on the expenditure side) or tax refunds (on the income side) are also part of a liquidity plan. Incoming orders can be used as an indicator of planned sales.

Incoming payments (cash inflow) include, for example

• Revenue
• Proceeds from sales (for example, from the development of fixed assets)
• Subsidies
• Private deposits
• Income from borrowing
• income from investments
• Input tax refund

The disbursements (cash outflow) include

• Personnel costs
• Payment of turnover tax or tax arrears
• Investments
• Incidental costs (such as energy costs or leasing rates)
• Material costs
• Private withdrawals

What is not included in liquidity planning

However, only those business transactions that are processed via the cash desk or bank accounts and that actually result in an inflow or outflow of funds are taken into account in the entry. This means that not all business transactions are automatically cash effective.

Depreciation or provisions, for example, are not recorded in liquidity planning. In the case of depreciation and amortisation, they are indeed costs. However, these costs are only incurred at the time of acquisition. In the depreciation period, however, they do not result in an outflow of funds.

Step by step to the liquidity plan

In order to draw up a liquidity plan, various steps are required. They can be roughly divided into the recording of liquid funds, the preparation of forecasts and the revision of forecasts.

In principle, the following procedure can be defined:

1. Anyone who wants to create a liquidity plan as a financial manager, managing director or company founder must first determine how much liquid assets he has at his disposal. To do this, he must record how much money is available in the cash box and in the accounts.
2. The recorded amounts from the cash and bank balances are then added together - the value indicates the amount of liquid assets at the beginning of the period (period 0).
3. Then the income and expenses for a given period must be listed - for example, for one month.
4. Afterwards, the payments are deducted from the receipts. This results in the value at the end of period 0, for example an over- or under-coverage.
5. Based on this result, the liquidity planning is now carried out for the individual periods, starting with period 01.
6. When the end of the first period is reached, the comparison with the actual values follows and - on this basis - the adjustment of the following periods. The planned values are thus compared with the actual values and all subsequent plans are revised.
7. After the end of period 01, actual values are available again, which can then be used to revise the following periods, starting with period 02. The plan is developed on a rolling basis.
8. On the basis of the individual forecasts, values now result for each period, which the company can use to monitor, plan and control liquidity over time. For example, the liquidity plan shows how much liquid funds are still available at the end of a period.

In SAP, applications such as SAP Central Finance or Liquidity Plans considerably simplify and facilitate the preparation of a liquidity plan. The big advantage: liquidity planning can be automated and is based on current and harmonized financial data.

Liquidity planning vs. income statement

In addition to liquidity planning, the profit and loss statement (P&L) is also a part of the financial planning of companies.

However, liquidity planning cannot be directly compared with the profit and loss account. It can happen that a company makes a profit, but its liquidity is still insufficient.

The reason for this is that the receivables are already booked as income - but a customer has not yet made the payment due to a payment deadline in the future. Therefore, no money has yet been credited to the account.

What is the difference to capital requirements planning?

Capital requirements planning is also a part of the financial planning of companies.

In contrast to liquidity planning, however, capital requirements planning involves longer-term planning over several years, which concerns the coverage of capital requirements and the commitment period of the capital.

The main task of capital requirements planning is to estimate capital requirements and to control the raising of debt and equity capital for investments. A capital requirement plan is therefore primarily an investment financing plan.