If you’re running a small business, chances are you’ll hear the term liquidity much more than you ever imagined. It’s just that it’s critical for small businesses to be able to use their cash or move their assets in order to make payments quickly. In fact, your company’s chances of survival depend a lot on how much you’re able to make instant payments if the need arises. But how exactly do you stay liquid? Here’s a guide to liquidity management that might be exactly what you were looking for.
We already mentioned above that
liquidity is extremely important for every small business out there but why is this
the case? In times of crisis and recession, having cash at your disposal can
mean the difference between having to shut down your business and staying
afloat.
Moreover, when there’s cash in
your business, you’re free to make any investments you want that could help
your business grow. Without it, your business risks being stuck at a mediocre
level forever. Therefore, it doesn’t come as a surprise that a company’s
overall health is often mirrored by how much cash it has.
Starting on time
Managing your liquidity is all
about starting on time. When there’s a carefully-designed plan in place, it’s
much easier to stay in control over your company’s money. So, if you decided to
start managing your liquidity more efficiently, it’s time to start working on
your plan.
Think about how much money you
can set aside every month and how you should keep it. Also, consider working
with debt collection experts or factoring in order to stay on top of your
company’s money. Just bear in mind that each of these strategies won’t help
much if you don’t start implementing them on time.
Cash and assets you can convert into cash
When managing liquidity, it’s important to understand that cash and cash equivalents are the most efficient assets your small business can have. The reason behind this is that you can use the cash you have to make payments instantly.
The same goes for cash equivalents which include things such as stocks and mutual funds. Any asset that has a maturity of fewer than 90 days is considered to be a cash equivalent since you can convert it into money whenever you want.
Dealing with urgent expenses
We already mentioned above that
liquidity is the key to surviving unexpected situations. But what to do if
there’s no money in your business and an urgent expense arises? It’s too late
to start managing your liquidity better but you need your business to keep
going.
Knowing what to do in situations
like this can save your business, no matter how big the problem is. For
example, always consider turning to a company
that offers same day loans when there’s an emergency expense that
has to be dealt with.
Materials aren’t an efficient liquid asset
One of the most frequent
questions new business owners ask is whether materials are considered to be a
liquid asset. Technically, you can view them as a liquid asset as you’re
probably able to sell them at any given time.
However, if you decide to keep
them and transform them into your product, you’ll be able to make a lot more.
Not only that but if you sell the materials you have, you’ll have to buy them
again in the future. This means your business will lose money, making materials
liquid assets but not efficient ones.
Know where your money is going
Many rookie entrepreneurs believe
that all the income their business gains is a liquid asset. The problem is, a
large portion of the income is almost always tied as a future expense. So, no
matter how much money you make, you can’t count on it being a liquid asset
until you pay your employees, buy new materials and pay your company’s bills.
If you want to know how much money you can consider being liquid, it’s important to keep track of your expenses. That way, you’ll know how much money you’ll need in the future and you’ll be able to manage your liquidity more efficiently.
If you want to manage your liquidity efficiently, remember that you have to start on time and be prepared for emergency situations. Other than that, start keeping track of where your money is going and think about ways how you can ensure there’s more cash in your business.
