One thing that many businesses look for in their efforts to grow and succeed is an improvement in liquidity ratios. What is business liquidity and how can you improve it?
What Is Liquidity?
Liquidity refers to your business’ ability to access enough cash to pay off any immediate or short-term — within a year or less — debts. Essentially, it is a reflection of how easily you can liquidate assets to cover your liabilities.
What Is a Liquidity Ratio?
Your liquidity ratio is a measure of the assets you can easily liquidate relative to your liabilities. If you have a 2:1 liquidity ratio, it means your liquid assets cover your liabilities twice over.
Why Is Good Liquidity Ratio Important?
A high liquidity ratio tells potential investors how much confidence they can have in your business. The higher your ratio is, the more likely it is that you can ride out a downswing or a sudden call on your debts or obligations and remain a strong, functional business. This means you should have an easier time acquiring capital at favorable terms.
High liquidity also means if there is some kind of emergency requiring cash, you will be able to meet it without hamstringing your business in some way. However, keep in mind if your liquidity ratio is too high it could mean you’re not putting enough of your money to work for you.
How Can You Improve Business Liquidity?
You can improve your business liquidity in the following five ways.
1. Streamline Your Overhead
Many companies accept their overhead costs as simply the price of doing business. Do a fearless inventory of your overhead costs and ask yourself if you really need to be paying that much in overhead or if there are “necessities” you can eliminate or negotiate a better price for.
2. Negotiate With Vendors
Some vendors insist on fast payment, others may not be so rigid. If you can negotiate benefits from your vendors like longer payment cycles and discounts, you can hold onto your money for longer, giving you more liquidity.
3. Submit Invoices on a Regular Basis
When it comes to your invoices, it’s easy to get behind in sending them out. In many businesses, paperwork often seems to get shoved to the end of the day, the week, the month, etc. Make submitting invoices part of your daily, or at least weekly routine, so money will be there when you need it, and you won’t have to scramble to chase down money in an emergency.
4. Move Short-Term Debt to Long-Term Debt
When it comes to accounting liquidity, long-term debt is better than short-term debt. It can be tempting to finance your business with short-term debt but using long-term debt instead should be your goal if you’re looking to improve your liquidity ratio.
5. Get Rid of Assets You Don’t Need
The best way to increase your liquidity is to liquidate! Take a look at each of your assets and ask yourself if these assets are really helping you or if they’re just places where you’re parking your money.
For more tips on streamlining your business and improving profitability, contact us today.
