Cash is the single most important factor for the survival of any business. Hence the term is said to be “cash is king”. Therefore, your business well-being 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 of expanding.
What is liquidity for small businesses?
In small business accounting, liquidity is the capability to measure the current assets to meet the respective current liabilities. Liquidity is the term used to describe how easy it is to convert something into cash. For instance, if you own a house, you could turn it into cash within one year by selling it.
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, they cannot be quickly converted into cash. To maintain liquidity, current assets like investment and inventories, which you can quickly change to cash, are more valuable for your small businesses than fixed assets, like vehicles.
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.
Important factors to maintain liquidity
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 payments 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 a billing notice as a reminder for late payment to your customer. The bottom line is; get paid quicker and pay slower.
Do you have excess cash in your account?
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 won’t just like your savings, but it must also give you higher interest than your savings. A capital investment like a 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.
Why is liquidity important for your small business?
Liquidity is the most important factor in sustaining your small business operations and liquidity should be considered as the lifeblood of a company. When the capital (cash) is flowing, businesses can purchase inventory and pay expenses such as salaries. Maintaining liquidity helps your business in a long way.
Here are some of the regular basis stocktaking benefits of your liquidity.
1. Secure other funding or a loan
Liquidity ratios help banks and investors determine how much cash your company has to pay off its debt.
2. Track your small business financial health
Liquidity is a company’s ability to handle its financial obligations. By measuring it, you can figure out how much cash you need to keep and invest. By measuring and analyzing your small business liquidity, you can monitor your company’s growth and financial health.
3. Benchmark your competitors
Track what your similar competitors and high-performing companies in your industry do, in order to make and meet goals.
How to maintain and improve liquidity for your small business?
Just maximize your liquidity by maintaining the cash flow. Follow the below steps to maintain liquidy in your small business.
- Consider taking personal loans.
- If your client is unable to offer payment terms beyond those initially agreed upon, you can try negotiating extended terms based on whether or not you’ve been a good customer.
- If you have assets that are costly to maintain but don’t generate much profit, it might be time to sell them
- Track your expenses each month so you have an accurate budget, especially the costs of office space, utilities, rental fees, and professional services
- If you’re even remotely interested in getting paid by a client, find out when and how you can submit your invoices and then give it your best shot.
- If you currently have any unpaid invoices, consider using a factoring company to get an advance on future sales.