Liquidity, in the simplest terms, is the ability to pay bills and costs as they arise. The term “liquid business” refers to a business that has sufficient liquid assets to meet all costs without having to sell fixed assets such as property or machinery to do so. Of all business assets, the most liquid is of course cash, with the least liquid being property or heavy machinery which can take months to sell in order to raise funds.
There are three commonly used measurements of liquidity but the most common, the Current Ratio, compares current assets (those collectible within 1 year) with current liabilities. Companies with good liquidity usually have a ratio of around 2:1, showing that they are more than able to meet their obligations.
Superior Management of Liquidity
As business owners know, the overall efficiency of your business operations can be vastly improved by superior management of your liquidity. While a good level of liquidity must be maintained at all times to minimize all risk, it also enables you to take advantage of opportunities as they arise.
Liquidity is affected by many factors, some of which lie within your control, while others do not. Some events which may affect your liquidity are very difficult to forecast. It is essential that a “safety net” of cash must be accessible at all times for any realistic eventuality.
To improve your liquidity, you should:
1. Optimize Account Structure
Most entrepreneurs and small businesses will use several bank accounts of differing types and sometimes with more than one institution. Ensure that your account structure allows for quick decisions and straightforward transfers between accounts for unforeseen circumstances or costs that must be paid at short notice. The amount of cash that you choose to have available will depend on many potential factors and may vary according to your industry and market position, but always ensure you have adequate funds at your disposal in easy to reach accounts.
2. Skim Funds
A tip for making your money work for you and for improving your liquidity is to regularly skim excess funds from your accounts into a higher interest earning account. Be sure that funds in this additional account can easily be accessed if needed.
3. Obtain Good Purchase Deals
Negotiate longer payment terms on any purchases so that funds stay with you longer, and so that these funds can earn interest as above. Remember, however, that purchases must generate revenue to be worthwhile; otherwise, they will put a strain on your liquidity.
4. Streamline Your Assets…
If you have equipment, machinery or premises that are not generating profit, then it is time to sell them. As above, anything that is not generating revenue for you at this time is a burden on your liquidity.
5. …And Streamline Accounts Receivable
Monitor your accounts receivable to be sure you are collecting payments owed in a timely manner and that others are not affecting your liquidity. Look into receivables finance solutions.
6. Look At Overheads Carefully
Carefully monitor all business overheads to ensure that all savings that can be made on indirect expenses have been made.
7. Borrow If Necessary
If essential to improving your liquidity, take out a business loan at a preferential rate to provide a necessary safety net, improve working capital and to take advantage of any golden opportunities.
8. Consult Professionals to Fully Optimize Capital
HSBC can maximize the potential of your balances by managing cash on a portfolio basis that accesses more than 50 markets across the world. Its range of global liquidity solutions allow you to use a range of self-funding, deposit and investment techniques to optimize working capital.
Its key techniques involve the elimination of idle balances by sweeping the excess into a single master fund which can then offer greater interest than the primary business account. For the purpose of the scheme, balances can be pooled across accounts without commingling funds. Regardless of currency or location of individual accounts, preferential pricing is received based on total balances across all participating accounts.
The service is uniquely tailored so that all local market regulations are adhered to, and services are restricted as necessary so that customers may be assured that their investments are being correctly handled.
This approach of consistent service and a high level of information available to clients easily allows the configuration of HSBC’s services with the client’s existing management systems.
If you want to learn more about calculating your company’s current assets for the purposes of calculating the current ratio, see the guide created by Housecall Pro.
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