Liquidity in business is crucial for unlocking funds and growing your organization, but you can also use it as a measurement to check the health of your business. If you don’t yet have a concrete understanding of what liquidity is and how it can work for you, here’s a brief overview that can help in your business’s financial planning.
What is liquidity in business?
Liquidity refers to how easily you can turn your assets into cash to pay any unexpected costs within the next year. It is often represented as a ratio of what your company owes versus what it owns. Companies with high liquidity can easily handle any short-term debts while companies with low liquidity could face bankruptcy.
Why does liquidity in business matter?
In the most direct way, liquidity can point to your company’s ability to stay afloat in times of need. If you were suddenly facing a pile of unanticipated expenses, would you be able to liquidate your assets and cover them? Do you have desirable assets that can move quickly?
Too low of a liquidity ratio is a cause for concern, because if a company is unable to liquidate its assets, it may not survive. If you maintain a higher liquidity ratio, however, you can have more peace of mind about your company’s future — even in an irregular market.
Although you may not be considering your liquidity ratio, it’s an important measurement to prove your business’s sustainability. Most importantly, investors and banks will evaluate your liquidity ratios when considering you for any loans or funding. A strong ratio shows them that your business is a good candidate and you will be reliable in paying back any loans. Those funds can be exactly what you need to cover other debts or make the next big step to grow your business.
To track financial health and position yourself for growth, regularly monitor your business’s liquidity. Having a good sense of your liquidity can help you make the right decisions about purchases and spending money to keep your company on the right financial track.
However, finding the right balance can be tricky. Although you want to have a high enough liquidity ratio to cover any expenses, keeping too much cash on hand can mean you aren’t taking advantage of investment or growth opportunities, making your company stagnant. In order to set financial goals for your own company, monitor other businesses in your field and develop a better sense of your possibilities.
Managing liquidity in business
To manage your liquidity, keep track of where your company spends money and anticipate your expenses in the future. When you can foresee your spending, you can minimize your need for emergency funding and further debt. Although you can’t predict the future, you get a sense of your recurring expenses.
It’s also important to balance your assets. Your business has a mix of liquid and illiquid assets. Liquid assets are those you can quickly and easily exchange to cover your debts or get cash. Illiquid assets are more difficult to exchange, depending on market value or the number of interested buyers. Your company’s liquid assets may include cash, bonds, mutual funds, and precious metals. Illiquid assets are things like real estate, collectibles, or brand identity.
When properly utilized, a treasury management strategy can enable you to easily liquefy your assets — even if they were previously constricted. Both liquid and illiquid assets are necessary to have a financially healthy business.
If you’re looking to change how you manage your business’s liquidity, a treasury as a service solution like Treasure can help. Let Treasure help you maximize your idle cash to generate new revenue and further bolster your company’s liquidity.
Start your treasury management journey and open an account with Treasure today.