You are looking at your company’s liquidity ratios and you are concerned. They are not as high as they should be and this is not good. If their value is not impressive then it means that your business does not have the ability to convert assets into cash quickly or your business is not able to buy and sell assets without affecting its price.
You need cash to run your business. After all, you cannot always buy and sell on credit. Your business will always have short-term obligations and to meet them you will need to have plenty of cash on hand or at the very least have assets that can be converted quickly. Your vendors and suppliers might not be willing to wait a long time for their payment. What if they were to stop supplying you with the raw materials needed to make your products? What if you are not able to pay the interest on the loans that you have taken from the bank? Businesses always have unforeseen emergencies and unexpected expenses. You will need cash to meet these unforeseen emergencies. That is why a business needs liquid assets and the liquidity ratios need to have good value.
So how can you improve your liquidity ratios?
Submit your invoices as quickly as possible to your customers. The more your accounts receivables increase and the faster you receive money for your sales, the better your current ratio will look and you will have enough cash. Give importance to aging accounts and work hard to make the customers pay. Pay off some of your own liabilities as quickly as possible, especially the minor ones that do not have high monetary values. Having efficient accounts receivables processes in place will help you in this direction.
Use long-term debt to finance your business instead of short-term debt. Long-term debt gives you the benefit of smaller monthly installments and lowers interest rates. The principal is also not due for repayment immediately. Removal of short-term debt from your balance sheet allows you to have better Quick and Current ratios and allows you to save some of your liquidity in the near term and put it to better use.
Every business has unproductive assets. I am sure that yours has too. It is just lying there, wasting resources and not earning anything. It is time to get rid of them. Try and get a good price for it. However, there are some assets that are not worth anything in the market, and you would be better off just disposing of them for whatever they are worth. After the sale, your cash balances would go up, you do not have to account for depreciation, and the ratios would subsequently improve.
Examine how much you are spending on rent, labor, professional fees, marketing, and so on. You will be surprised how much of these are unnecessary. Cut back on them and your short-term expenses automatically go down. The cash you are able to retain in the business also increases. Soon, your Current and Quick ratios start looking mighty impressive.
Some vendors are quite finicky about being paid quickly. But others are not. Try and negotiate longer payment cycles with them. Get them to give you discounts. You can hold on to your money longer and also pay a little less than what you would have had to previously.
Keep a watchful eye on those liquidity ratios. They are the lifeblood of the business. Since they concern about the short term, they are harder to solve and require urgent measures to fix when they are in trouble. Businesses have gone broke for lack of liquidity. Do not get into such a situation. Always make sure that you have a healthy bank balance or at the very least, possess assets that can be converted to cash quickly. A capable and efficient CFO service provider would provide you the assistance required to ensure that your liquidity ratio is above par.
Invoicing can be a breeze for small businesses! Learn how to manage efficient invoices, ensure timely payments, and stay tax-compliant in this guide.
Payroll compliance mistakes result in financial penalties, employee dissatisfaction etc. Know about mistakes and best practices for an error-free payroll.
Receiving payments on time is crucial for financial health. Learn how the accounts receivable turnover ratio is calculated and utilized.
A financial risk can jeopardize your business stability. Explore effective strategies for mitigation in our latest blog.
A trial balance serves as a vital tool in accounting by providing an overview of financial health. Explore the best ways to create and analyze it here.
A balance sheet is your financial compass, and we've got the ultimate guide to create one. Dive into "How to Make a Balance Sheet" now!
Balance sheet and income statement are two vital financial tools. Learn their differences and when to use each for better financial decision-making.
Financial statements are vital tools for assessing a company's health. Discover the four key types in-depth.
Accounting teams are transforming to enhance efficiency and compliance. Explore best practices for a modern department structure.