If you’re running a small business you’ve probably heard the term “liquidity” quite a lot. And in order to give your small business a proper chance to succeed, it’s absolutely necessary that you understand it completely. Basically, liquidity is how fast you can move when it comes to payments. Therefore, if you want your small business to survive, you have to put some extra effort into managing liquidity. But before you start doing so, here’s everything you need to know about liquidity management.
We’ve already talked about what is liquidity but why is it so important for your small business? First of all, it’s very important to say that reduced liquidity can slow your business down quite a lot. In extreme cases, it can even force your small business to fold. Let’s take a look at it this way – you need to buy materials for your products and in order to pay for them you need cash. And when there’s no cash in your business, the only thing you can do is apply for a loan. Even though this is a good solution to this problem, you don’t want to borrow too much. The more debt you have, the more money you’ll need to pay it off, which is something you’ll need to have in mind.
In order to set your business off to a good start, you need to think about liquidity management even before you put up that “open for business” sign. This means you’ll have to evaluate how much money your small business will be spending every month and how much money will be at your disposal when it comes to managing new projects. If there’s not enough cash for things like this, your small business simply won’t be able to move forward. Luckily, when starting out, liquidity management doesn’t have to be difficult. It’s all about having enough cash in your business and making sure this will be the case a year from now as well. Of course, if you want your business to experience a huge growth, scaling up the amount of cash needed is an absolute must.
One of the biggest mistakes rookie entrepreneurs make is mistaking profit for cash flow. Even though making profit is always a good thing, it doesn’t necessarily mean that you’ll maintain a healthy cash flow. When you make a sake, the profit you make is visible on your balance sheets but it doesn’t ensure that you get cash straight away. That transaction can last a few days but if some issues come along, this could take even more time. This means you’ll have no cash to cover your expenses until you get your money. This is the case because you can’t use the money on your balance sheets but you can only use the cash you actually have. If you find your business short on cash and you need money to cover your expenses, turning to an organization that offers cash loans is a great idea.
As we’ve mentioned earlier, liquidity management includes predicting your cash needs in advance. This is where you’ll need to bear in mind that not every month is going to be the same, since businesses in every industry experience some inconsistencies. Have these inconsistencies in mind and you should be able to figure out how much cash your business will need throughout the year. Only if you understand your company’s cash needs for the future will you be able to manage your liquidity effectively. Even if you do this, setting up a cash reserve for rainy days is still a good idea. If you’re struggling to forecast your company’s cash needs, you might want to think about using an accounting system that tracks your expenses and helps you monitor your cash flow.
So, when it comes to liquidity management, you simply have to make sure you always have cash at hand. Therefore, you’ll always want to aim at boosting your cash flow as much as possible. The best way to do so is to start sending invoices the day you make a sale. Moreover, you might want to look into the possibility of offering discounts or better deals to those who pay you on time. Of course, there will always be clients who don’t pay their dues on time. Dealing with such clients is extremely important since the last thing you want is for one of them to hurt your company. Sending a polite reminder is the first thing you should do but if that fails turning to experts who collect overdue invoices is your safest bet.
Managing your liquidity is something you’ll simply have to do, no matter what kind of business you’re running. Get everything right and you won’t have to worry about your small business not having enough cash to keep going.
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