Cash is King: Maintaining Liquidity in your Small Business
Cash is the single most important factor for the survival of any business. Hence the term, cash is king. Therefore, your business wellbeing is determined by how easy it is to get cash when it needs it. A liquid company has more cash available at its disposal than an illiquid firm. Therefore, it has a better chance at expanding.
A small business must be liquid to get loans, finance projects and handle an emergency. As essential as fixed assets like buildings are for a company, it cannot be quickly converted into cash. To maintain liquidity, current assets like investment and inventories, which you can quickly to change to cash, are more valuable for your small businesses than fixed assets, like vehicle.
No matter how prudent you are as an entrepreneur or a solopreneur, you would need to spend money on certain things. These are called expenses. Lower expenses boost your money reserve. You can reduce your small business overhead costs like rent, repairs, telephone bills and accounting fees. A great way to minimize accounting fees is by using online accounting software for small businesses.
Your account receivable and account payable are two essential variables you must manage effectively to monitor and maintain positive cash flow and further increase the liquidity of your business. If you cannot afford not to buy on credit, then try to negotiate longer term of payment with your creditor. More so, make your customers pay their debt on time by offering them incentives, like a discount, that would make them pay faster. You can also send billing notice as a reminder for late payment to your customer. The bottom line is; get paid quicker and pay slower.
There are times you have excess cash in your account. When this occurs, the best thing to do is to invest the excess cash. There are different forms of investments but the best one to keep your business afloat has to be open-ended and with higher interest. You must be able to have access to your investment when you want just like your savings, but it must also give you higher interest than your savings. A capital investment like machine might seem like a significant investment, but factors like depreciation and leakages must be considered when buying such items. This is because; it might tie down your money instead of keeping it.
Loans and personal finance are not just ways of funding your business; they also prevent it from drowning. A loan is one of the means of keeping your business breathing or even as a way to get start-up capital. However, to finance your business or getting cash through a loan, you must negotiate to spread the loan repayment for a longer period. This would reduce the burden on your business.
Since you are an entrepreneur, you can fund your business through personal finance when you are short of cash but do not make it a habit. Ensure you separate business finance from personal finance. In fact, one great way of ensuring that your small business stays liquid is to reduce the amount of personal drawing you make from the business.