Business liquidity is crucial for both big and small businesses, especially if you want your business to be open for the long-run. To help you learn more about business liquidity and how you can improve it, here is what you need to know.
What Is Liquidity and Why Should I Care?
Liquidity refers to a company’s capability to pay bills without compromising your business’s operations, incur extra debt, or sell assets. In layman’s terms, it means how capable you are of paying your bills when you have to without negatively impacting your business’s finances. So, payment methods and timely payments are crucial when you want to maintain liquidity.
Typically, business liquidity focuses on how quickly you can settle short-term assets and current liabilities. Examples of current liabilities include accounts payable, short-term loans, taxes, bill payments, etc. Examples of short-term assets include inventory, cash/cash equivalents, marketable securities, etc. Liquidity is important because it helps account professionals and investors measure a business’s overall financial strength and creditworthiness.
How to Improve Business Liquidity
Assessing overhead costs is crucial for both established and new businesses. If you see an opportunity to lower an overhead cost, do it. Of course, you will want to make sure that it does not negatively impact your company’s production. However, if you see subscriptions, bills, etc., that you do not need, you can reduce them or cut them out.
There are also many unique ways you can cut costs. For instance, let’s say that your bank transfers and checks are costing you a lot, but you still need to make payments. You can use online payment methods instead to cut down on the fees. You can try to spot ways you can reduce your rent, professional and indirect labor fees, advertising, rent, etc.
Check Your Accounts Receivable and Payable
To make sure that you are paying things off and getting things paid on time, you need to keep an eye on your accounts receivable and accounts payable. For instance, you need to carefully monitor your accounts receivable to ensure that you are billing properly and getting prompt payments. Stay on top of your accounts payable to maintain your business’s liquidity by using secure payment methods. You can try negotiating with your vendors for longer payment terms if needed.
Your business may have more assets than you know. However, that does not mean that all of them are worth keeping. Take a look at your business’s assets and see if any of them are “unproductive.”
If your company is simply storing these assets, get rid of them. You do not want to hold onto something and spend money that it nothing making you earn anything. You want to focus on spending your cash on assets that generate revenue, like vehicles, equipment, and buildings. You may be able to sell these assets, so you can make some cash back for these assets.
Liquidity is important to maintain for any business, and you can follow any of the tips above to improve liquidity in your business.