Businesses that find that they don’t have enough capital to handle their responsibilities are on a slippery slope to financial ruin. While many businesses do fail as a result of poor liquidity, this doesn’t have to be the case. With better liquidity management, companies can improve their financial standing.

Best Practices for Liquidity Management

Liquidity is a business’ ability to be financially responsible while operating their business without sustaining significant losses. Businesses need to have enough of their capital readily available as liquid assets when it comes time to pay their bills. 

Liquidity is generally assessed through various ratios, two of which are the quick ratio and the current ratio:

The current ratio :

This ratio can be calculated by taking the number of a business’ current assets, then dividing that by the total current liabilities.

The quick ratio:

The quick ratio uses the same formula as the current ratio, less a business’ inventory in current assets.

Protect your company’s finances with the following liquidity management tips:

1. Use Sweep Accounts

Sweep accounts are essentially savings accounts that allow businesses to gain interest on excess cash balances. Whenever there is excess cash in a business’ operations accounts, owners can sweep them into interest-bearing accounts so that they can gain interest during times when they aren’t needed. When bills come due, you can simply transfer the funds back into your operating account. You’ll be pleasantly surprised to see that your funds have grown thanks to the interest rate in the sweep account.

2. Assess Overhead Costs

Though overhead costs can’t be completely eliminated, do what you can to reduce them. By lowering your overhead costs, you’ll be able to improve your profitability. These expenses include advertising, rent, indirect labor, professional fees, and other indirect expenses. By pulling money from these areas, you’ll have a better opportunity to stay liquid. 

3. Eliminate Unproductive Assets

If your business is storing unproductive assets, it’s time to clear them out. Any time you tie your cash up with an asset, these assets should be making money. If your business has invested in any vehicles, equipment, or buildings that are costing you money, it’s time to let these things go. 

4. Monitor Accounts Receivable

Responsible liquidity management requires businesses to stay on top of their invoices. When billing clients, businesses should do their best to guarantee prompt payments. To ensure no payments are forgotten or past due, these businesses should have a plan in place for following up with these clients.

5. Negotiate Terms for Accounts Payable

When it comes to accounts payable, businesses can improve their liquidity by negotiating for longer terms. By building long-term relationships with certain vendors, companies can work out a payment plan that makes it easier to meet their responsibilities. The longer terms a business can negotiate, the longer they can keep their money.

6. Switch to Long-Term Debt

Need to finance your business but don’t have the capital to do so? Long-term debt is a better option for business owners than short-term solutions. With long-term loans business owners will benefit from the lower interest rates and smaller monthly installments. In turn, these businesses will be able to have more cash on hand than they would if they took out a short-term loan. 

Additionally, with debt consolidation loans like those available from Roseland Associates, existing debts can be rolled together into one lower interest loan. This is often a life saving decision which serves to reduce monthly payments as well as saving accounting from the headache of balancing various loans and payments on different schedules. Particularly for small businesses, these loans from Roseland Associates can nip overdrafts and late payments in the bud, therefore maintaining the creditworthiness of the business and reducing costs.

7. Monitor Owner’s Draws

Business owners that take out money from their business’ operating accounts are in danger of sabotaging their company’s liquidity. Owners must scrupulously monitor these owner’s draws for non-business purposes to avoid putting a financial drain on their business. The same strategy should be considered for business-related draws as any withdrawals should always be tracked carefully.

8. Review Profitability

A business’ prices should never remain stagnant. In order to increase cash reserves, businesses should regularly up their prices. As costs grow and markets continue to change, businesses must change their prices as well. By reviewing profitability on their services and products, a business can make changes accordingly to what they charge clients. 

Business owners must closely monitor their liquidity ratios. Failing to do so can result in bankruptcy and the dissolution of the business altogether. Keep this guide in mind as you work to effectively manage your business’ liquidity.