Liquidity forecasts in manufacturing companies

Poor liquidity planning is the most common reason why companies end up in insolvency. In the current times of crisis, this can have fatal consequences and manufacturing companies in particular often do not have all the components in front of them. Therefore, liquidity forecasts are a particularly important function in financial management. This is because the risk of a liquidity bottleneck - and thus insolvency - can be reduced, especially if financial managers or plant managers use liquidity forecasts to make strategic decisions. In this article, we will show you how liquidity forecasts can also help your company.

What is liquidity?

It's a well-known fact that liquidity is important. But what does it mean anyway? A company is liquid if it can pay its invoices and other liabilities on time. Only payment flows are decisive for liquidity, i.e. all transactions that will touch the bank account or the cash register. Therefore, it cannot be directly compared with the income statement. It may well happen that the company records a high profit in one period, but the liquidity is still insufficient. This is usually due to customers using their payment terms. In this case, receivables are already booked as income, but the payments are still outstanding. On the other hand, there are also business transactions that affect liquidity but not the company's success, for example, taking out a loan.

Purpose of a liquidity forecast in manufacturing companies

Solid liquidity planning can reduce the risk of insolvency. The reason is simple. When you have an overall view of all cash inflows and outflows in your business accounts, you use this as the basis for your liquidity planning. From the status quo, you can see what your business expenses are each month and what your revenue is.

If you project this data into the future under certain assumptions, you will get a liquidity forecast for the coming months. For example, if you anticipate declining customer demand, factor this into your liquidity planning with lower revenues than in previous months. In this way, you can estimate whether you will continue to generate a surplus in the coming months or have to reckon with a deficit.

The liquidity forecast plays an important role, especially in production. It gives companies insight into future liquidity to determine when you will need capital to cover production costs. This gives companies a better idea of how much they need to invest in production, when they will need it and how much they will get back. This can help avoid financial shortfalls and ensure that production is funded in a timely manner.

Advantages of liquidity forecasting

The main goal of liquidity planning is to ensure that the company is solvent. But those who take a thorough approach to preparing a liquidity plan reap several benefits at once.
  1. Avoiding liquidity bottlenecks: An accurate liquidity plan provides a view into the future. If financial bottlenecks are expected, these are taken into account accordingly in the plan and it is possible to see how they will affect liquidity in the coming months. This enables management to take timely action if solvency is at risk. For example, by taking out a loan, postponing a project to a later phase or selling assets.
  2. Greater transparency: a good liquidity forecast clearly shows all the company's incoming and outgoing payments and provides a transparent overview of the cost structure in the company.
  3. Increase in cash holdings: Only those who know their cash flows precisely can optimize and adjust them in the best possible way. This means that surpluses are precisely identified and then used for investments. In addition, this often reveals unnecessarily high costs that can be reduced through cost-cutting measures, thus increasing the company's liquidity - and, in the long term, its profits.
  4. Future-proof planning: A plan is only as good as the data on which it is based. If you know exactly what is happening in all your accounts and record it in full in the liquidity plan, you can make very precise forecasts. This supports management and financial officers in planning their corporate or financial strategy.
  5. Basis for important corporate decisions: Management makes important decisions on the basis of liquidity forecasts, for example when and whether to make an investment. Wrong strategic decisions are reduced if a valid liquidity forecast is available.
Requirements for a liquidity forecast
  1. The liquidity forecast must be detailed enough to provide a clear and complete overview of the company's future financial situation.
  2. The liquidity forecast must be prepared using projected revenues and expenses based on historical data, current trends, and future expectations.
  3. The liquidity forecast must be updated regularly to ensure that it remains current.
  4. The liquidity forecast must include a cash flow statement analysis showing future cash consumption and future cash receipt.
  5. The liquidity forecast must include scenarios for various economic circumstances and a wide range of possible expenses and revenues to provide the most accurate picture of the company's future financial position.
Liquidity forecasts in Monitor G5

Many companies create their liquidity forecasts or plans in Excel. However, this is very time-consuming and error-prone. However, there are now digital tools in the form of liquidity management software that, unlike Excel, handles many routine tasks automatically. However, it is even better if the ERP system offers this function: It already contains all the relevant data. This eliminates the need to manually type in rows of figures, and financial managers can see at a glance every day how liquidity is currently doing and what the future might hold.

In Monitor G5 ERP, you have the option of creating liquidity forecasts for upcoming incoming and outgoing payments. The information for the forecasts can be obtained from quotations, sales orders and customer receivables in the sales module. Also, from purchase orders and vendor payables in the purchasing module. For billing plans, the delivery periods in partial invoice lines are used to calculate liquidity. Data can also be obtained from manually entered incoming and outgoing payments, such as wages, taxes, etc.

Adjusting the planning is thus done quickly because the data is always up to date. This leaves you more time for the important tasks: formulating groundbreaking strategies for your company based on the liquidity forecast data and implementing them as soon as possible.

Conclusion: Improved liquidity control and planning

Liquidity planning plays a significant role in manufacturing companies. It prevents the company from becoming insolvent. It also helps management to initiate measures at an early stage to prevent liquidity bottlenecks from occurring.

To prepare a valid liquidity forecast, you need a precise overview of all cash inflows and outflows. The highest accuracy in planning is achieved by working with suitable software such as Monitor G5 erp-system/" 2532 rel="nofollow" target="_self">ERP. Liquidity planning is thus updated every day and provides the best starting point for liquidity forecasting as well as a sound basis on which managers can more easily make important decisions for the future.