One of the things that will keep your small business afloat is having access to cash when you need it. Your small business liquidity has to be balanced and watched carefully, or problems are sure to abound. This is especially true if you are seeking to secure a business loan or other form of credit.
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Generally, when you are looking to maintain the liquidity of your business, you want to have a ratio of about twice as much in assets as debt. This means that you need about 50 per cent of all of your assets available in a liquid form. Lenders can start feeling nervous if you have less than this amount.
Keeping this ratio as close as possible to the ideal 2:1 requires that you keep a constant eye on it. Creating too much inventory can easily cause an imbalance because inventory cannot always be turned into cash easily – except by selling it. The correct amount of inventory you need to keep on hand should be carefully evaluated by taking into consideration how fast the product is selling, and how long it takes to restock an item. You also need to look at how much of that product you sold this time last year. The same thing should also apply to supplies needed to keep your business going. Keeping too many supplies around reduces your liquidity.
Evaluating assets that your business has needs to be done periodically. Assets that do not generate income, such as property or expensive machinery not being used, should be sold – or put to use to generate more income, if you need to rebalance your ratio and give you greater liquidity.
Making sure that your customers are paying their bills on time will also help your liquidity problems. Customers who pay late means that you have less cash on hand each month, and it can make paying your bills more difficult, too, or getting less interest on your investments. Watching over when payments are being made and possibly sending additional billing notices may help you reduce the number of late payments you have monthly. You may also want to give a little discount for on-time payments as an incentive.
Another way to increase your small business’s liquidity may be to re-evaluate your products, services, and prices. If you have not changed your prices to meet the rising cost of inflation or cost of living lately, then you can expect to see less liquidity – and less profit. Through careful evaluation, you can raise your prices, stop selling products that aren’t selling, or start selling additional products.
Looking at projections in the future is also necessary to maintain a healthy amount of liquidity for your business. When you know that lean month’s occur every year around a certain time, then you want to prepare for it. You can do this by reducing your inventory, putting more money away during more prosperous seasons, eliminating unnecessary expenditures, and sticking closely to your budget.
If you are already having problems with liquidity for your small business, there are ways to get help – before it is too late. You may be able to talk to your lender for help with reviewing your budget and determining problem areas with your finances. Other professional money management tools and professionals may also be able to help you with better money management methods. The key, though, is to get help before it is too late – or before you make moves to keep your business going that may only make matters worse.
This article was written by Karl Stockton for Twelve Month Loans, a company which can assist you in learning about payday loans over 12 months.
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