Creating a liquidity budget

What is a liquidity budget?

A liquidity budget shows the expected income and costs of your business per month or quarter. This is how you determine whether your business has enough money for all required payments. Such as salaries of your staff or rent payments for your business premises.

Liquidity and cash

Liquidity indicates if a business can pay its bills in the short term. It has sufficient liquid assets. In other words, there is enough money available, either as cash or in the bank. You can calculate liquidity for your business. It is the ratio between available money and the required payments. The outcome is a number: a liquidity ratio.

Why do you make a liquidity budget?

A liquidity budget is useful because:

• You have insight and look ahead.

You know whether there is enough money for the required payments. It tells you whether your business needs extra money in certain months. For example, for paying out holiday allowance for your staff in May. But also when it makes sense to make an investment. Such as buying a delivery van.

• You can make adjustments when necessary. For example, by postponing an investment.

• It is often a condition when applying for financing. For example, if you want to take out a loan from a bank.

Financial plan

A liquidity budget is part of a financial plan which, in turn, is part of a business plan. Most entrepreneurs arrange this when they start their business. In addition to the liquidity budget, a financial plan consists of:

• Investment budget

This lists all the investments a business wants to make in the coming years. Think of buying a machine, van, or an office building.

• Financial budget

This shows how the investments will be paid for. For example, with own money (equity capital) or loans (debt capital).

• Operating budget

This lists the expected turnover and costs (for example, rent and salaries). It calculates if a business can make a profit.

Tips for your liquidity budget

• Take customer payment terms into account. On average, it takes 45 days for someone to pay an invoice.
• Also consider holidays. If your business closes during the holiday period, you will have no orders during that period. That means no income.
• Some payments return every month or quarter and you cannot postpone them. For example, taxes, rent, telephone charges, and wages.
• Make sure the amounts include VAT. Remember: in your operating budget, the amounts are without VAT.
• Watch the KVK video Making a financial plan: operating, liquidity and private budget. Click the settings wheel for English subtitles.

Example liquidity budget

For an example of a liquidity budget, see KVK's Book of Finance. Or ask your financial adviser or your sector organisation. They can help you with information and advice.