Liquidity refers to how readily you can convert your business assets into cash. It’s an important financial attribute that can be measured using one of three liquidity ratios.
High liquidity can protect you during an emergency and give you the funding you need to tackle a new business project. But what if your company’s liquidity is on the low side? You can boost business liquidity using one of the following strategies.
Note: this is part two of a two-part series on liquidity. Review part one to understand liquidity and its role in business.
1. Reduce Overhead Expenses
Every liquidity ratio measures current assets against current liabilities. One surefire way to improve your ratio is to reduce your liabilities. By cutting down on overhead expenses, you’ll be better equipped to allocate resources to other expenses.
For example, you might consider switching providers for things like utilities, insurance, or internet. Likewise, if your company uses a lot of paper products, going digital can minimize the amount of resources you consume.
You may need to put certain overhead expenses on pause during periods of economic uncertainty.
Cutting back on your marketing budget, for instance, might be a temporary cost-cutting measure that can improve your liquidity ratio. Once things improve, you can reinvest this money back into your company.
2. Get Paid Faster
The faster you get paid, the sooner you’ll have access to cash.
Ensuring prompt payment is easier than you think. Electronic invoicing software can prompt your clients to pay their outstanding bills and will typically send frequent reminders until the balance is paid.
Some companies go one step further by offering a small discount to customers who pay their invoice within the first week they receive it. This lowers the total amount you receive, but in some cases, having cash in hand is more valuable than getting the full payment at a later time.
3. Pay Your Bills as Late as Possible
The more cash you have on hand, the more business liquidity you’ll have. As such, it can help to pay your bills as late as you can get away with, thereby ensuring that you have more cash on hand for your own expenses.
Where possible, you can also negotiate with your vendors and other creditors to move your deadlines to the end of the month, allowing you to maintain your access to necessary cash prior to the deadline.
Of course, if your organization has a lot of large monthly debts, it may be more prudent to stagger your deadlines so you don’t deplete your operating cash once each month.
4. Reduce Your Inventory
Do you have items that don’t sell as frequently? If so, you might cut back on your resupply orders to reduce the amount of inventory you’re purchasing. By buying less of this poor-selling inventory, you’ll be able to devote the leftover cash to other projects or improve your overall business liquidity.
Alternatively, eliminating a poorly-selling item from your inventory can clear up room to introduce a new product that sells well. This, too, will improve your business liquidity and provide a boost in working capital.
5. Consider Sweep Accounts
Sweep accounts are specialized financial accounts linked to either a bank or investment account. Their purpose is simple: if you have unused money rattling around in your operating accounts, you can “sweep” this money into an interest-bearing account.
You’ll have to go through the process of setting up the appropriate accounts with your bank or investment broker, but by doing so, you’ll earn passive income (in the form of interest) on the money your business isn’t currently using.
Just make sure you’ll have quick access to these funds if circumstances change; otherwise, you’ll actually lower your business liquidity.
6. Cut Back on Non-Business Draws
Are there areas where your business is losing money for non-business purposes? Owner’s draws, for example, represent times when the owner is removing too much cash from the business to maintain liquidity. Cutting back on these sorts of draws can improve your business liquidity dramatically.
7. Adjust Your Prices
Price adjustments are a last resort for many businesses, as they can jeopardize customer loyalty or contract renewal discussions. But if inflation is already impacting your business, it may be a necessary step to stay afloat.
Keep in mind that many U.S. businesses are having to make these adjustments to keep up with inflation and new economic demands. Customers may be more understanding than you realize and retain their loyalty as long as your prices stay consistent with inflation rates.
Staying Ahead by Staying Afloat
In an age of rapid inflation, many entrepreneurs are looking for creative ways to improve their business liquidity.
The aforementioned practices can improve your cash flow and ensure that you meet your obligations no matter the broader economic climate. Accountants and CFOs may need to understand these basic business principles to advise other senior leaders on the best way to navigate the world of business.
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