There are a lot of factors that contribute to the success of a business. But, the most essential factor is money management.
In fact, most startups fail because they run out of money at some point. Others fail due to cash flow issues. Even if you get a personal loan for business, you need to manage the money smartly to avoid getting into money problems.
This is why business owners must focus on the liquidity of their companies. Read on to know more.
What is liquidity?
In simple words, liquidity represents a company’s financial performance and its ability to convert assets into cash.
Liquidity also means the degree to which a company can meet its short-term and immediate cash obligations, without experiencing major losses.
Liquidity management is a method to properly manage a company’s assets, including cash. These assets can help the company in meeting its liabilities.
If you take a personal line of credit for business, you need to spend it wisely. Essentially, liquidity means managing assets and cash flow to cover business expenses. Liquidity management also helps in maintaining the financial stability of the business.
How to avoid liquidity risks
With liquidity management, startups can avoid liquidity risks.
Liquidity risks are situations when a business doesn’t have enough funds to meet its current liabilities. With liquidity management, you can implement cash flow forecasting and liquidity buffers to avoid such risks.
Let’s consider a business that is profitable but can still fail since it is running out of money. Waiting for customers’ payment via invoicing is one way that a business can run out of money.
Generally, an invoice can take anywhere between 30 to 120 days until they are due. But you will have expenses to cover during that period. If you don’t have cash, you cannot operate your business and may have to declare bankruptcy.
Liquidity management prepares you for such liquidity risks in advance. You can apply for a personal loan to cover for expenses while you wait for invoice payment.
In short, liquidity management prepares you to have cash ready to meet your current liabilities.
Importance of preparing a financial statement
Understanding the financial aspect of the business is critical to keep the company financially healthy.
You need to understand where, why and how the money is coming from. More importantly, you need to understand where the money is going.
When you practice liquidity management, you will be required to prepare a financial statement. It would help you understand the company’s financial status. This would further help you manage money efficiently. You can make informed decisions about financial assessments.
To conclude, liquidity management helps you handle your liabilities and assets efficiently. It helps your company avoid financial troubles. What’s more – you may even be able to develop different payment strategies that will help you generate more profits. Apart from that, you can improve your cash-flow and use your assets to generate higher revenues.
All this will eventually lead to the success of your business.