If you don’t have enough current assets to pay the current liabilities, then you’ve got a liquidity problem, and when the situation isn’t addressed, that’s when you end up with a situation described below.
Imagine it’s a Thursday afternoon. The phones are howling – your suppliers are chasing you for overdue payments, and the bank are pressing for a meeting to review your latest accounts and to review your facilities (which are all being used to the limit), and your employees are all hoping to be paid by the end of the day (but you’re not sure how). Hopefully you've never been in a situation like that, but here's how to ensure you never will.
In business, you’ll have certain assets that will turn into cash within the next 12 months (i.e. trade debtors) and you have certain liabilities that need to be paid within the next 12 months (i.e. trade creditors, VAT etc).
So liquidity gives you choices, and gives you freedom. It means when a big opportunity comes up, you’re able to move to take advantage of it, because you’ve got the resources available. That’s important, because it means you’ll be able to take opportunities to improve profitability and grow your business, allowing you to build a stronger, more valuable business.
Liquidity also gives you time and space to make decisions, so you aren’t forced into a tight situation where you are at the mercy of your creditors, the banks or anyone else apart from you.
Wholesaler, North West
Business was profitable, but running at a cash deficit of around £50k p.a, with an overdraft that was increasing every year.
In our consultative visit we were able to demonstrate how small changes would revolutionise the business into a cash generating organisation, generating £260k cash in just 12 months.
So if liquidity is so important, how can you improve in 2016? Here’s some key points:
Have a plan, and stick to itRetaining net profit after tax and owners drawings is absolutely key to improving liquidity. This doesn’t just happen automatically! You need a clear plan setting out how you’re going to make a true net profit, and you need to stick to it by regularly reviewing where you are against it, taking the action needed to stay on track.
Restructure finance if you need toCheck whether your finance is structured properly. By this, we mean make sure you are not in a situation where you are using short term finance (e.g. overdraft, invoice finance) as a long term fixture. Keep short term finance available for short term needs.
Control stockHigh levels of stock drag liquidity down, so challenge your current stock levels. Can you clear any of it quickly? Do you really need to hold high levels of stock in the modern business environment? Can you buy in smaller quantities?
If you’d like help to improve liquidity then please get in touch with us – we’ll be more than happy to help.
What our clients say:
Thank you very much for coming to see us, it is much appreciated by us and we can only gain from this regular contact to get strong cash wise.
We took your advice on debtors when you were here last ... and it's worked!