Liquidity budget - how to do it | Saldo accounting

Written by: 
Mattias Segerbrand

That you as an entrepreneur and entrepreneur should keep track of your company's finances may seem obvious. Unfortunately, the reality is different as many entrepreneurs do not know what figures in their finances they should look at and above all not why. To get a proper picture of your company's financial health, you need to look beyond the money that is or isn't in your bank account. You must have a budget for both your performance and your liquidity. In this article, we will talk about it later and explain how to create such a budget.

What does liquidity mean? 

Liquidity is a word you probably recognize and it is used to describe your company's ability to pay, that is, your ability to pay debts in the short term. Liquidity is a key ratio that is common in financial statements and gives a picture of the company's financial well-being. If a company has 100% cash liquidity, it means that here and now they would be able to pay all their short-term liabilities. To calculate your company's cash liquidity, you set your current assets minus your inventories and work in progress, in relation to your short-term liabilities. 

Cash and cash equivalents - what is it?

The term liquidity refers to the assets your company can use to pay salaries and other direct costs that require capital. In other words, it is money that is not tied up in any fixed asset. In cash and cash equivalents, you should not include any short-term investments, that is, money the company has invested in funds or shares. 

Liquidity budget 

To keep track of your company's liquidity and the cash flow of your business, it is important that you set up a liquidity budget. You always start by reviewing how much money you have at the beginning of a given period and how much more money you expect to come in or be paid out. So you should review your income and expenses in relation to how much money you already have. This relatively simple calculation gives you an overview of how much money you have left after the given period is over. 

By setting up a liquidity budget, you can answer how your cash looks today and create a forecast of how it will look in the future. You can use your liquidity budget to plan your business. It gives you confidence in your decisions because it predicts how future costs and investments will affect your business.

You have probably already understood that you need a liquidity budget and if the information above is not enough for you to be able to establish one yourself, we will be happy to help you. Contact us at SaldoWe are here for you and your company.

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