Many clients ask me what is the most important thing for a business to have? Most will say Cash on hand. While having available cash is important, I believe Liquidity is always king. Sometimes Cash is just not enough. Many Business owners do not understand what exactly Liquidity is, nor how to obtain and improve liquidity for their businesses so below should assist.
The simple definition of Liquidity is the ability for a business to cover its immediate short term debts and obligations. Examples of such would be Payroll, rent, and vendors.
Why is cash not always enough? Well lets take an example. You just received a very large order and will need to purchase a larger size of materials than your vendor will allow you credit for, assuming your vendor has given you a line in the first place. You look at your current cash position and realize that it will be needed to cover the period it will take to facilitate this order. This is where liquidity will come in to play. Cash is not sufficient enough to meet the short term expense demands of the business.
So what do you do? Well if your business has liquidity, that means that there are other Assets on your Balance Sheet that can be leveraged to meet that short fall. Accounts Receivable finance is a great tool to do so, as it expedites cash flow. Refinancing Equipment or Real Estate may be another option or simply having a Line of Credit available to you thats based on historical cash flow, if you do not have the other types of assets mentioned. The bottom line is having Liquidity available, whether its utilized or not, is very important to a business. Do not wait until its needed, make sure you have it available within a few days. Obtaining cash quickly is costly and are some of the worst financing tools in the industry.
Some ways to improve your liquidity are to be diligent around managing your Balance Sheet. On the Asset side, Review the average collection time of your customer receivables so you can properly project your cash position to be able to meet your short term expenses. If you are seeing a short fall on a regular basis then obtaining a Line of Credit or Factoring might be a good solution if your margins can withstand the finance cost. A business with a healthy ROI usually can! Another means is to review all assets such as machinery and equipment to determine if the output you are getting from them is sufficient to your return expectations. If they are not making you money, do not keep them. Selling them for the cash might be a good option. A business should never sit on a dormant asset for the sake of having it. If it isn’t making you money, liquidate it.
Then there is expense management. A business owner should constantly be reviewing accounts payables and ensuring they are keeping up with expenses. You should always ensure the expense is needed or can that expense be reduced. Are your vendors charging too much? Maybe negotiate payment terms or discounts for paying suppliers quicker. Keeping expenses manageable is critical to a Businesses margins. The more revenue you have and the less cost, the better your margins so you should always be looking at ways to reduce cost.
Analyze the products and services you are offering. If you are not generating profits from a particular product or service, then it might be time to eliminate or replace it.
At AFS, we are experts in creating, managing and maintaining Liquidity and we would be happy to assist you in getting your business more Liquid. Contact us today for a free consultation.