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Effective Liquidity Management and Smooth Cash Flow for Small Businesses
Written by: Shiv Nanda
If you run a business, you must come across a lot of challenges. But the biggest of them is liquidity crisis. This negative financial situation is the result of the lack of flow of cash. So, before we get on to how to handle financial crisis through effective liquidity management, let’s brush up on:
Cash Flow: Money that flows in and out of your business in a month is called cash flow. The cash coming in from clients or from collections is called incoming cash. And the payments, employees’ salaries, purchases, etc. come under the outgoing cash category. The difference between both determines whether your business is under profit or loss.
Liquidity: Liquidity is a business’s ability to meet short-term fund requirements using in-house assets that can be converted to cash quickly. Examples include inventory, short-term money market securities, etc. However, the most liquid asset is cash.
Why Businesses Need Good Liquid Management
The success of a business is largely dependent on its ability to handle both short-term and long-term obligations. Long-term obligations can be planned but for short-term obligations, you must be sure that there is a fixed source to raise funds quickly. Meeting operational expenses, paying off liabilities, and staying innovative – all of this requires good liquidity management.
How to Stay Liquid
Established firms often aren’t much concerned about liquidity since they always have excess cash. However, liquidity can make a huge difference to startup owners, self-employed professionals, and other businesses that are still in their growing phase. It can even save a business from going down if managed effectively. So, here are a few tips that will help you maintain adequate liquid cash:
- Never lose sight of your goals
You can be certain that your business is making progress if you can set aside a significant amount every month that can be used as liquidity. Hence, you must minimize your liabilities. And the best way to do that is to stay focused on your goals since it allows you to make the right decisions at the right time. Here are a few things you should ensure:
- There is a minimum profit every month. Plan scaling your business if profit is sure-shot. Just being able to meet your operational costs is poor liquidity management.
- Unproductive assets are not taking up space. If some assets are not making you any money, sell them off and invest the amount you receive in your business.
- You never lose an opportunity to reduce overhead costs.
- Bill your clients early and get paid in time
Submit invoices as early as you can and make sure that there are more accounts receivable at any time. Moreover, create strong policies and relationships with your customers so they make payments on time. And use the cash flowing in for investments and to support operations in your business.
- Always have a credit line
A credit line can come to the rescue in case of liquidity crunch. So, think through the possible cases of emergency beforehand and accordingly, opt for a credit line that will be readily available at the time of need such as buying an expensive piece of equipment due to emergency breakdown. Personal loans for self-employed businesses are available conveniently with longer payment periods and smaller instalment amounts. And the best part is that you pay interest only on the amount used out of the total credit available to you.
- Consolidate the debt and pay over a longer period
Pay off any smaller liabilities that you may have. If you have multiple debts and you’re paying separate interests, consolidate them into a single bigger debt. You can opt for a personal loan for business to have convenient payout options such as longer payment cycles and smaller EMIs. Holding onto the money longer will allow you to have liquid cash for business operations.
You may have a million tasks that need your attention but liquidity management should be your top priority. You shouldn’t wait for a financial emergency to present itself. So, use these tips and ensure that the cash flow isn’t obstructed so your business runs smoothly even during the times of financial crisis.