Businesses need cash to open, operate, and grow. But, even with healthy sales, some businesses struggle to maintain the cash on hand they need. But figuring out your company’s cash position is more complex than taking a look at what you have in the bank. Here is what you need to know about business liquidity so you can avoid uncomfortable situations and achieve the best results.
What is Business Liquidity?
Liquidity refers to how easily your business can turn its assets into cash to pay for unexpected costs over a specified period, often a year. Businesses with high liquidity are able to handle short-term obligations easily, while those with low liquidity could struggle or even face bankruptcy.
Liquidity is generally represented as a ratio. The two most common ones used for measurement are the current ratio and the quick ratio. The current ratio is the broadest, which is found by taking your current assets divided by your current liabilities. A ratio of 2:1 is usually considered good.
The quick ratio is more conservative because it excludes inventory in the equation. In general, a higher quick ratio is a sign of better financial health and creditworthiness.
Why Liquidity Matters for Your Business
Liquidity is important for your business because you need to be able to pay your bills when they become due. Here are some of the reasons you should be keeping track of this financial metric:
- Understand your financial health — When you understand your financial liquidity, you can strike the right balance that allows you to pay your bills yet avoid having too much cash on hand that isn’t working for your business.
- Benchmark against competitors — Knowing your liquidity ratios can help you benchmark your business against others in the industry and work toward improving.
- Secure much-needed funding — Investors and various lenders look at liquidity ratios when determining a business’s ability to repay debt.
Tips for Managing Your Business Liquidity
Finding more ways to generate and hold onto cash will improve your business’s liquidity. Here are just a few tips for managing and boosting your business’s financial position:
- Increase sales — Look for ways to boost your sales to bring in more revenue.
- Reduce costs — Find areas where you can reduce costs, such as overhead or operating costs.
- Improve collections — Get vendors to pay you faster by offering discounts or sending reminders for unpaid invoices.
- Sell assets — Sell any assets that aren’t driving revenue in your company, such as unused equipment.
- Repay debts — Refinance or repay debt faster to free up cash flow.
- Manage inventory — Avoid tying up too much cash in inventory that isn’t turning over quickly.
Grow With CAB Capital
As you can see, having adequate liquidity is vital for the health of your business. If you would like to learn more about your options, CAB Capital can help. We assist small businesses by offering alternative lending solutions that meet their particular business needs. Contact us today to schedule a free consultation.