Liquidity as part of your business planning analysis.
Your business needs to understand its business! A business consulting and planning specialist may help you to determine the critical ratios and figures necessary to really understand your business.
Liquidity is a very important concept for a business. It is a measure of your company’s ability to meet its obligations or debts as they come due. It is the most important component of success for a company. Liquidity keeps the company in business for the short term.
Having enough liquidity to meet your bills also pays off in other ways: if special “deals” or discounts come along where you are able to purchase inventory or other items less expensively than normal, you stand to increase your profits. This is one of the best ways to maintain a competitive edge in the long run.
A business consulting and planning specialist can help you calculate not only the liquidity but also how to make things work so you have enough cash at the time you need it
Your business consulting specialist should include taking the current, collectible assets, such as your accounts receivable, cash on hand, short term investments and other things which will turn into cash over a short period and comparing them to the current items that you will have to pay in a short time, such as accounts payable, payroll taxes, income taxes and payroll that is due.
This business planning will include an analysis of the accounts receivable turnover. This is how many times during the year the outstanding accounts receivable “turn over” or are collected. If all accounts are collected at the end of 30 days, the turnover is 12. This can also be expressed as the number of days it takes to collect your receivables, or “Accounts Receivable Days”. It is crucial to maintaining positive liquidity.
A business consulting and planning specialist will have access to comparisons of other companies in your same line of business and will compare your results in these areas to regional or national results. A good goal is to make your ratios better than the national average.
The following are good tips for good business planning:
- Monitor the amount of money you are spending on activities unrelated to operations
- Try to eliminate or reduce some of the overhead or fixed costs to reduce the monthly expenses.
- Prepare yearly forecasts that show cash flow levels at various points in time. Update them frequently to predict and prepare for potential cash shortfalls.
- Have a backup source for funds, such as a line of credit, but plan to operate your business on its own without needing this backup. Use the backup only as a last resort.
- Avoid prepaying expenses or accounts payable. If discounts are offered for early payment, this could be a reason to pay sooner than the agreed upon terms, but otherwise, pay as you have agreed and not before.
These are only a few ways that you and your business planning and consulting specialist can work together to increase the liquidity of your business. Call us at 505-828-0900 or 970-667-2123 or email to email@example.com