As a board member, do I have to prepare a liquidity plan?

Under the new company law, which comes into force on January 1, 2023, the board of directors is explicitly responsible for monitoring solvency. The preparation of a liquidity plan is helpful in this regard.

Liquidity and earnings
Liquid assets are the air a company breathes. In established, mature companies, there is usually harmony between generating profits and creating liquidity through operations.

However, there are many situations that can lead to liquidity shortages even in inherently profitable companies. Debtor payments are delayed due to poor economic conditions. Major investments are made in property, plant and equipment. The financing of the company becomes more expensive due to increased market interest rates.

Liquidity bottlenecks can immediately threaten the existence of the company.

Revised company law as of January 1, 2023
The importance of liquidity is now also brought to the fore in the revised company law. The law, which will apply from January 1, 2023, requires in Art. 725 para. 1 CO that the board of directors monitors the solvency of the company. This was not explicitly regulated in the old law. The board of directors only had to act in the event of a loss of capital and overindebtedness. The same applies analogously to limited liability companies.

Cash is king
Economically, this makes sense. Losses for creditors and investors are felt directly through the company's inability to pay, while losses of balance sheet equity usually have only an indirect impact.

Need for action by the Board of Directors
The board of directors thus also has a formal duty to monitor the company's solvency. The analysis of solvency is always forward-looking. Para. 948a para. 2 CO requires a forecast horizon of 12 months. However, depending on the type of business activity, a longer-term planning horizon may also be appropriate. This may be the case, for example, when major investments are pending or financing is due to expire.

Liquidity planning can be integrated into corporate planning. The breakdown should be based on the key value drivers of the business model. A breakdown into cash flows from operating, investing and financing activities in analogy to the cash flow statement can be useful.

The preparation of a meaningful liquidity plan by the board of directors is an interesting instrument for analyzing the company and its markets and implementing potential for improvement. It supports risk management, it supports corporate management and it is a valuable prerequisite for the preparation of business plans for corporate transactions.

The preparation of regular planning is also an excellent prerequisite for being well positioned in a corporate transaction, such as succession planning. We will be happy to advise you.

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