Liquidity in Business – What it is?
Liquidity represents a company's ability to meet its short-term obligations such as wages, supplier payments or loan repayments, as they come due, without causing significant disruption to its operation.
Businesses typically have a mix of liquid and illiquid assets in their balance sheets. The liquidity refers to how quickly and easily an asset can be converted into cash. Cash is obviously the most liquid of all but other assets with high liquidity include shares or debtors. Assets with low liquidity include property or large, expensive equipment, which take longer to sell.
Liquidity in business – Is it important for my business?
Good liquidity is essential for the financial stability and long-term success of a business. It provides a safety net against unforeseen challenges and enables the company to benefit from growth opportunities.
Conversely, poor liquidity can significantly increase the risk of financial distress and a business's viability if suddenly faced with unexpected debt, for example, a costly machine repair or a large tax bill. Therefore, businesses should carefully manage their cash flow, maintain adequate reserves, and have contingency plans in place to mitigate liquidity risks.
Understanding the importance of business liquidity is crucial and will help you make sure your cash flow remains strong so you can cover expenses and unexpected events.
Enhancing Business Liquidity – Strategies for Improvement
Implementing these generic strategies a business could enhance their liquidity position and optimise their cashflow.
- Negotiate more favourable payment terms with suppliers.
- Review stock policy. Leaner levels of stock leads to less cash being tied up, keeping in mind the importance of being able to respond to customer demands.
- Analyse customer payment cycles – could customers be incentivised to pay quicker with an earlier settlement discount is an example of a potential incentive.
- Evaluate current and future debt requirements, seeking guidance from specialised debt advisory / broker to ensure the whole of the market is explored for more cost-effective financial solutions.
- Ensure obligations with HMRC (PAYE, VAT, Corporation Tax) are structured correctly and consider payment plans or utilising tax funding solutions, these facilities allow you to cover your HMRC obligations without over stretching.
- Maintaining detailed cash flow forecasts is paramount. Regularly reviewing and updating this forecast allows for proactive decision making and early identification of potential pinch points.
- Restructure for increased profitable. Restructuring can be a very effective way of refocusing your business on those activities that are most profitable, while moving away from those that are less profitable. Selling off unprofitable assets can also generate cash that you can use to strengthen your business in other ways. You might need specialist advisors to help you to find the most effective ways to reorganise your business, putting it on a stronger footing for the future.
Understanding the importance of business liquidity is crucial and will help you make sure your cash flow remains strong so you can cover expenses and unexpected events. Effective liquidity management is essential for the long-term success and sustainability of any business.
Explore Business Liquidity Solutions with us
Protecting your cashflow is vital as adequate working capital ensures your business can operate smoothly.
The Banking & Finance Team at MHA provides debt advisory services, guiding businesses and their owners to growth with proactive, tailored banking and finance advice plus access to whole-of-market commercial finance lenders to help businesses find the right finance and funding solutions for their situation.
We act for clients at various stages of their growth journey, be that investing in new products, services, or technology, enhancing cash flow, or those simply wishing to review existing borrowing arrangements. Reach out to [email protected] to discuss your requirements today
