Draft a liquidity budget: check if you have enough money

What is a liquidity budget?

A liquidity budget shows how much money you expect to receive and spend over a period of time. It lets you see whether you have enough money to make your payments.

It is best to draw up a liquidity budget for several months in advance. This way, you can see in good time when your balance may fall too low. You can then, for example, spread out payments, make arrangements with suppliers, or arrange extra funding in good time. It is particularly important to plan ahead if your income and spending are not evenly spread throughout the year.

A liquidity budget is part of your financial plan.

How to draw up a liquidity budget

Start with the amount you have in your bank account and in cash at the start of the period.

Next, list the dates on which you expect to receive money. Think of payments from customers, a loan received, or other sources of funding.

Next, list the payments you expect to make. These might include rent, the purchase of materials, salaries, taxes, and loan repayments.

Pay close attention to when you receive and make payments. For example, a customer may receive an invoice in March but not pay until April. In that case, include the income in your liquidity budget for April. Similarly, include the payment for an investment in the period in which you make that payment.

Also, take seasonal factors into account if they are relevant to your business. A campsite, for instance, generates more revenue in the summer than in the winter. Expenditure can also vary from period to period.

Costs and expenditure are not the same thing

A cost item is not always an expenditure at the same time. Your operating budget sets out the costs you expect to have. In your liquidity budget, you look at the payments that will actually leave your account or your cash reserves.

For example, if you buy a machine costing €15,000 and pay for it straight away, you include €15,000 as outoing in your liquidity budget. In your operating budget, you spread the cost over several years through depreciation.

What are your income and expenditure?

Your income and expenditure will depend on your business. Enter all amounts in the period in which you expect to actually receive or pay out the money. Examples of income include payments from customers, a loan or other form of financing received, or your own money that you invest in your business.

Expenses include, for example, purchases, rent, staff costs, insurance, loan repayments, investments, and taxes.

When it comes to VAT, keep in mind the date by which you must pay VAT to the Netherlands Tax Administration. Have you invested in business assets or incurred significant costs? If so, you may be due a VAT refund. Include the VAT in your cash flow forecast for the period in which you expect to pay or receive it.

Not all the money you receive or pay out is turnover or an expense. For example, a loan received is an income item in your liquidity plan, but not turnover in your operating plan. The repayment of that loan is outgoing, but not an expense.

Example of a liquidity budget

The closing balance at the end of one month is the opening balance for the next month. This lets you see how your available funds change over the course of the year.

Liquidity budget as part of your financial plan

The liquidity budget is part of your financial plan. Complete the plan with an investment budget, an operating budget, and a financing budget. Also, include a personal budget that shows how much money you need for personal use and what amount of that must come from your business.