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What Is Liquidity Planning?

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Last editedMay 20222 min read

Liquidity planning refers to the practice of managing cash and ensuring you’ve got enough for when you need it. This involves planning ahead to meet every-day cash expenses, plus precautionary planning in case of an unexpected event or investment opportunity.

In this post, we’ll take a closer look at liquidity planning, what it involves and tips for optimizing it.

What does liquidity mean in financial planning?

Financial planning involves creating a detailed plan for the year ahead, and more of a rough overview of the financial picture over the next couple of years. Typically, financial plans will be as realistic and as detailed as possible. Planning in this way can help businesses preempt problems and take measures to rectify them in advance.

Liquidity planning can be a valuable asset to financial planning. It involves ensuring a company’s solvency and can help business owners predict how much liquidity you will have in both the short and long-term.

Goal of liquidity planning

The goal of liquidity planning is to estimate a likely level of future liquidity. It can be used to predict the financial future of a business, and is highly valuable when it comes to risk assessment.

Indeed, liquidity planning is a key aspect of integrated financial planning, which involves income statement planning, balance sheet planning, and other components. 

Optimal liquid planning can also help generate additional income. This is because it allows businesses to invest unneeded liquid profitably as soon as it becomes apparent.

Liquidity financial planning checklist

Below are some key suggestions for getting the most out of your liquidity planning:

Know where all your money is coming from

In order to ascertain whether you have enough cash to cover costs and possibly invest, you need to have detailed knowledge of all of your business’s income sources.

Have accurate liquidity value of each asset

Next, you need to ensure that you have an accurate understanding of the liquidity value of all assets. This will involve knowing the ease and cost of liquidating assets. It can also be helpful to find out which assets can be used as collateral to allow for efficient and cost-effective liquid borrowing down the line.

Know your cash needs

Effective liquid planning involves having an accurate and thorough idea of your spending needs. This includes both short and long-term cash needs. This is key as it will give you a firm idea of how much surplus liquidity you will have, which you can quickly put towards investments.

Divide up your liquidity requirements

Another useful tip is to divide up your liquidity requirements into three categories; essential liquidity, precautionary liquidity and discretionary liquidity. Essential needs will be the cash needed to keep the business afloat, while precautionary liquidity is reserved in case of unforeseen events - think pandemics. Discretionary liquidity will look different in every company, but will usually be put towards investments and expansion.

Plan accurately

Thorough and accurate planning minimizes risk and helps identify incoming liquidity events. Liquidity planning should always be as detailed and realistic as possible for it to be effective in optimizing financial health.

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