10/10/2018 Increasing Your Business’s Liquidity - QuickBooks

Increasing Your Business’s Liquidity


By   Sakhuja
Payal 
2 min read

What is Business Liquidity? Business liquidity is the measure of solvency or liquidity of your small business. This
determines whether the business has current assets that they can pay off their dues. This will allow a business enough
leeway to make payments towards liabilities and have enough fixed assets to make larger businesses payments as the
business expands. Why Does it Matter? Small businesses will be able to take on larger purchase requirements and secure
greater extensions from those they are payable to, once they develop a trust among those they are payable to and when
they have sufficient funds to make disbursements. This enables a business to keep growing, allowing a business to spend
more, expand into larger markets and maintains a comfortable position for future expenditure and investments. How It
Determines Your Success If you can determine the success of your business based on your business liquidity ratio then
you can help you measure whether your business can pay off its short term debts. This allows businesses to know if they
are running a successful working organization that can keep up with payments and continue to be profitable. A business
with a larger coverage of liquidity assets to short-term liabilities is a clear indicator that it can pay all its debts at are due
and in the near future. Here are steps to increase your business liquidity:

1. Overhead:Every business needs to find ways to decrease overheads. Reducing overheads will impact profitability.

2. Unproductive assets:All unproductive assets should be sold and the return from sale should be used to buy assets
that generate revenue.

3. Owner’s draws:Examine the total amount of money that is used by the owner for his personal use. If too much of
money is taken out then there is an unnecessary cash drain.

4. Sweep accounts:With the use of sweep accounts, your business will earn interest on any excess cash balances by
transferring the funds into an interest-bearing account. This allows your business to earn interest when the funds are
not required and sweeping them back to your operating account when they are to be utilised.

5. Profitability:Review the profitability on your various products and services. Assess how prices can be increased and
costs decreased to increase profitability. Ascertain which products and services yield a profit. In this way, the
business should stop production of unprofitable products and services and train their business strategies on more
profitable ventures.

6. Accounts Management: To completely understand whether the accounts are tipping in favour of the business, you
need to know that the accounts receivable and accounts payable impact business liquidity. To increase liquidity, a
business should ensure customers receive and pay bills on time. If you delay sending bills to your customers then
this can severely hold back cash flow and damage liquidity. For accounts payable, vendors often offer a longer
payment plan or instalments. By lowering total payments due or spreading out the payments with longer intervals
between bills, the business can improve its liquidity.

Therefore in order to have an increase in business liquidity, your business should take into account how a business
channels its finance in terms of modes of payments and how it receives its funds in the form of receivables from its
customers. It is by having a favourable liquidity balance can a business make debt payments and continue to fund
company purchases.  

Disclaimer

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