Why Should Small Businesses Focus on Liquidity Management

Perhaps you’re wondering what the term liquidity management actually means. Well, in the business sphere, it refers to the ability of a company to pay off all of its financial liabilities without having to ‘break the bank’. In other words, keeping a close eye on your business’s balance sheet to make sure it doesn’t hit rock bottom. This is where a lot of small businesses fail as they don’t take all of their financial liabilities into account.

Consequently, because of this lack of proper administration, small businesses usually end up going bankrupt. Budgeting and cash flow management are essential parts of any successful liquidity management strategy. They’re the ones responsible for keeping your company, as well as its finances, clean and ‘healthy’. Therefore, let’s delve a bit deeper into the why and the how liquidity management plays a pivotal role in any small business venture.

Cash budget forecasting

Forecasting your expenses and then monitoring the same is an excellent way of predicting your business’s cash needs in advance. You want to make an annual projection for each month that is to come in order to spot any irregularities and inconsistencies in your budget. If such things do occur, then you want to try to rebalance your overall budget and find a solution to remedy the situation before you reach that bump in the road. People mostly tend to neglect these as they see them as mere income predictions, yet they are used primarily for anticipating needs. Failing to meet financial obligations will result in your business shutting down and going bankrupt. This is why it’s better to be safe than sorry and prepare for the worst-case scenarios before they happen in the first place. Hence, regular updates will ensure that the data observed is up to date and relevant for maintaining the budget. Another thing, you want to create a cash reserve that is neither too big nor too small, for those rainy days. To do this, use a cash accounting system to keep track of your expenses and monitor your cash flow. In addition, you could also download a cash flow forecasting template from the internet to help you organize the data properly.

Don’t mistake profit for cash flow

Even though it’s extremely tempting, don’t mix up the terms cash flow and profit, as they generally are not the same. They differ in one crucial aspect which is time. The profit, or income, you make from selling a product or service is visible on your balance sheet yet this doesn’t mean you get the money straight away. The transaction in question could take days to process, especially if you’re dealing with credit cards or things like PayPal. With these, time truly is money. Also, with PayPal, users can ask for a  full refund in a six month time period which means that at the end of the day you’ll not only lose the profit you’ve made, but you’d have to pay for shipping expenses etc., all for nothing. This is why liquidity management is so important, you need to be dealing with the here and now. You can’t use the numbers on your projected income sheet but you can use the cash that’s in your hands. Likewise, if you ever find yourself out of cash to pay your dues, consider taking some fast online cash loans to help you stay on your feet. It’s a way better alternative than having to close up shop.

Boosting cash flow

Closing the gap between the projected profits and the cash in hand should be the main focus of any small business when it comes to liquidity management. Usually, the income coming in from credit cards ‘floats’ between the supplier and the bank for some time until the money finally settles down. This is why faster cash collection systems are needed to maintain a steady stream of cash flowing into the business. Setting up lockboxes is an exceptional way of doing just that. Next, send invoices the day the purchase has occurred, the sooner the better. In addition, consider offering a small discount for those who pay their dues on time, for example, in the first three days. Also, use technology to your advantage. Why wait for credit card payments to arrive at your bank when you can get paid via mobile apps right on the spot. These apps allow users to swipe their credit cards on their phones and tablets, making both of your lives a lot easier. Finally, adopt a half now, half later approach with larger orders and place a deposit requirement for the same. You can go as far as demanding payment for the services offered first if you don’t fear alienating your customers by doing so.

To sum up

Liquidity management is vital for running a business at peak efficiency. The lack of it will cause a shortage of cash flow which in turn will affect your ability to meet your financial obligations and pay for all of your business liabilities. Therefore, plan your budget accordingly and cut the time needed for the cash to reach your hands. This way, you’ll not only secure your profit much faster, but you’ll also make sure all of your dues are paid on time.

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