During difficult financial times, it is extremely important to manage the financial health of a business, which includes liquidity – the availability of liquid assets, such as cash.
Cash is king
Why do I need to manage my liquidity?
Most businesses will have a portion of their value tied up in investments and assets, such as real estate, inventory and equipment. But to succeed and fund everyday operational expenses and growth, it is important to have some liquidity built into your balance sheet.
Efficient liquidity management will ensure your business is able to access cash when you need it to pay for goods and services, make payroll, and invest in new opportunities that may arise.
Even profitable companies can fail, by purchasing inventory or incurring production costs long before customers pay for the goods or services, creating a shortfall in available cash to pay the bills.
A short-term demand on funds is covered by having cash on hand to continue operating.
As companies grow and expand, they usually spend even more on new employees, new facilities, new inventory and new equipment, but if they have to wait too long to get paid by their customers and if they don’t have extra cash on hand, they could get behind on their obligations and end up with extra debt or even in bankruptcy.
Liquidity management is a function that enables a business to meet their financial obligations through either cash flow, funding activities, and/or capital management, and grow.