What is Business Liquidity?
Business liquidity is the measure of solvency or liquidity of your small business. This determines whether the business has current assets that they can pay off their dues. This will allow a business enough leeway to make payments towards liabilities and have enough fixed assets to make larger business payments as the business expands.
Why Does it Matter?
Small businesses will be able to take on larger purchase requirements and secure greater extensions from those they are payable to, once they develop trust among those they are payable to and when they have sufficient funds to make disbursements.
This enables a business to keep growing, allowing a business to spend more, expand into larger markets and maintains a comfortable position for future expenditure and investments.
How It Determines Your Success
If you can determine the success of your business based on your business liquidity ratio then you can help you measure whether your business can pay off its short term debts. This allows businesses to know if they are running a successful working organization that can keep up with payments and continues to be profitable.
A business with a larger coverage of liquidity assets to short-term liabilities is a clear indicator that it can pay all its debts at are due and in the near future. Here are steps to increase your business liquidity:
- Overhead: Every business needs to find ways to decrease overheads. Reducing overheads will impact profitability.
- Unproductive assets: All unproductive assets should be sold and the return from the sale should be used to buy assets that generate revenue.
- Owners draw:Examine the total amount of money that is used by the owner for his personal use. If too much of money is taken out then there is an unnecessary cash drain.
- Sweep accounts: With the use of sweep accounts, your business will earn interest on any excess cash balances by transferring the funds into an interest-bearing account. This allows your business to earn interest when the funds are not required and sweeping them back to your operating account when they are to be utilized.
- Profitability: Review the profitability of your various products and services. Assess how prices can be increased and costs decreased to increase profitability. Ascertain which products and services yield a profit. In this way, the business should stop the production of unprofitable products and services and train their business strategies on more profitable ventures.
- Accounts Management: To completely understand whether the accounts are tipping in favor of the business, you need to know that the accounts receivable and accounts payable impact business liquidity. To increase liquidity, a business should ensure customers receive and pay bills on time. If you delay sending bills to your customers then this can severely hold back cash flow and damage liquidity. For accounts payable, vendors often offer a longer payment plan or installments. By lowering total payments due or spreading out the payments with longer intervals between bills, the business can improve its liquidity.
Therefore in order to have an increase in business liquidity, your business should take into account how a business channels its finance in terms of modes of payments and how it receives its funds in the form of receivables from its customers. It is by having a favorable liquidity balance can a business make debt payments and continue to fund company purchases.