Small Business Guide to Liquidity Management

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.

Why is liquidity important?

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.