There are a lot of ways to look at the topic of a company’s net worth and financial standing and it has a lot to do with a company’s liquidity and financial flexibility. Here, not only will we be looking at the basic definition of what business liquidity is, but we will also be dishing out a couple of much-known but also easily-forgotten business management tips to help small businesses achieve healthier financial status.
The Definition of Business Liquidity
There are two ways to measure business liquidity - one in which companies look at a business’ cash position and ability to stay afloat; two, a company’s ability to pay off its short-term liabilities.
Even when sales are coming in strong, if a company does not have enough cash to maintain normal operations, its liquidity is unhealthy. Liquidity refers to the company’s ability to convert any of its assets into cash as a quick exchange of currency. When the business has healthy liquidity, financial challenges and its ability to secure loans will not be a problem.
In accounting, the measurement is based on the company’s ability to pay liabilities that are due in less than a year. It is often seen in the form of a ratio between what the company owes against what it owns.
In short, if you look at the total upcoming bills, do you have enough cash on hand to pay them off? If there isn’t, does the company have the ability to convert any of its investments or assets into cash to cover for them?
Why Assets Are Important
Companies need assets and healthy cash flow in order to operate their businesses smoothly. Whether you’re a manufacturer or offer services. Although most people think of assets in terms of cash and its equivalents, account receivables, inventory, investments, property, equipment, plant, vehicles, furniture and patents are considered assets too.
Although most people would consider anything of value that can be sold within a year to be great assets, anything with an established market value, extensive list of interested buyers, and ability to transfer ownership quickly and easily are also appreciable assets to hold onto.
It helps if you have precise valuation of your business fixed assets during their full lifecycle. The records will show profitability, financial position, accurate P&L reporting, increase goodwill and reputation of your business, and offer an assurance to shareholders as well as attract investors.
When a business has trouble meeting its short-term obligations, it may spell trouble. In order to maintain a healthy business liquidity, you’ll need to maintain sales numbers, ensure that invoices are paid on time, and pay your vendors and suppliers on time too. In fact, in some industries, they may either stop supplying to or buying from you if all these short-term obligations get jammed.
Here are some tips on maintaining healthy business liquidity.
1 - Early or On-Time Submission of Invoices
Make it a point to submit invoices to your customers as quickly and regularly as possible. Having a system that keeps track of all your account receivables means you can collect your money faster. The better the ratio, naturally, the more cash in hand you would have. You should also ensure that ageing of accounts is up-to-date to pay off your own short-term liabilities as quickly as possible.
Every business will need some form of financing at some point in the future. It is best to balance out short-term and long-term financing so that money is distributed evenly and you are able to repay the principal on a monthly basis. If you can, use short-term financing as sparingly as possible and focus on long-term financing which allows for better liquidity.
3 - Get Rid of Assets Not-Needed Assets
Every business will end up with a long list of assets which will become unproductive or need maintenance. For your business to have fluid cash flow, there needs to be a right balance between current, tangible, and intangible assets.
Assets help you generate revenue, increase the value of your business, and keep your business chugging. PLUS, fixed assets are great for small businesses since they’re often invested in and used for long periods of time. Most organisations and banks view fixed assets as an exemplary overview of your balance sheet and net worth.
However, it does not make sense for a business to accumulate unproductive assets. If they’re no longer in use, either throw them away, rent them out, or get a good price for them. You can read more about asset management here.
4 - Controlling Overhead Expenses
It may sound like an elementary or fundamental fact but many businesses overspend without examining their accounts or negotiating for better deals. Things like rent, labour and professional fees related to services we engage in, or even things we do for marketing…they should all be negotiated so that there is a win-win situation for all parties involved over a long-term business relationship.
Some businesses find themselves with some extra cash when they stop printing paper documents when they decide to digitise their business, or decide to stop printing business cards. For you, it could be something as simple as reminding office co-workers to switch the air-conditioning (or heating) system off when they leave.
INFT has a nifty team management system in place to help companies monitor team expenses in real-time. You can even top up team members’ cards as and when they’re needed.
5 - Longer Payment Terms, Cycles, and Relationships
Many businesses benefit from forming alliances and partnerships with others so that there is a mutual understanding on how we can move together forward. With these strings-attached negotiations, we tend to get better prices and get paid faster than others. For example, if you’re organising or running a marketing campaign together, you tend to also offer each other discounts, or reimburse your partners for their efforts, etc.
These little efforts matter when you see the big savings in the long run.
Although managing a company’s expenses and ensuring liquidity is a business basics, sometimes we forget. Especially when there are seasonal events going on or when there’s a major marketing campaign.
Our digital business financial solutions and tools are so agile and flexible that you can even integrate your account with the current accounting software you’re using. It takes nothing more than just a couple of clicks to get them synched up.
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