Given today’s uncertain economic times, it’s more important than ever for businesses to have some liquidity, i.e., cash on hand or the ability to convert assets into cash. Liquidity is important for a business because it can directly affect its ability to take on new projects, secure loans and be prepared for emergencies.
There are three ways to measure business liquidity, with the most reliable perhaps being cash ratio: Cash and cash equivalents/current liabilities.
If the resultant number is low, or even worse, a negative, businesses may suffer from liquidity risk—the risk that they can’t make their short-term debt obligations. This is not a position any business owner wants to find themselves in.
As a liquidity crisis looms, given the ongoing issue of high inflation, business owners would be well-served to ask their lenders the following questions:
- Are their deposits secure?
- Are banks lending?
- What options are available as banks increase their rates?
- What options are available if their loan is up for renewal?
One thing all lenders will agree with is that businesses that have solid liquidity are likely going to fare better in this economic climate.
Ways to Boost Business Liquidity
The good news is there are some ways for a business to boost its liquidity. Here are our top three:
- Reduce overhead expenses and inventory. It makes sense, right? Spend less money to improve the bottom line/liquidity. You may think about switching some of your service providers if you can find better deals, cutting back in spending where possible and even tinkering with your inventory, purchasing fewer poor-selling items or perhaps scrapping them altogether . Another option is temporarily cutting back on your marketing or advertising budget until your situation improves.
- Adjust prices. This is obviously not the most customer-friendly decision to make but it may be necessary if your business’ future is threatened. Your customers are certainly aware that inflation is hitting everyone and they may be understanding if you have to charge more, especially if you keep the increase in line with inflation rates.
- Pay bills as late as possible. It makes sense to pay your bills as late as you can—before earning a late fee—to hang onto your cash as long as possible. It may also make sense to negotiate with your vendors and other creditors to change your due dates to the end of the month, unless you have numerous obligations and then perhaps it would be better to stagger them throughout the month.
Contact Clear Skies Capital today at 800-230-9822 to discuss your business’ liquidity situation or learn if you qualify for business line of credit, working capital loan or other lending product we offer.