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Every company aims for financial stability. Achieving it requires knowing how to manage business liquidity. Many factors affect it, and each can cause difficulty accessing funds for current expenses. How can liquidity be managed properly so that it becomes something fully under our control?
What is financial liquidity?
Financial liquidity is a company’s ability to meet current financial obligations by holding sufficient cash or assets. It is therefore a measure of its ability to settle all obligations on time without disrupting operations.
Liquidity enables:
● operations without disruption or downtime,
● timely payments to suppliers and counterparties, maintaining positive business relationships,
● timely employee pay,
● covering current operating costs such as production materials, premises rental or marketing,
● investing in growth, for example equipment, employee training or warehouse expansion.
Insufficient liquidity may cause late payments to counterparties, suppliers and staff, downtime and inability to develop. This all leads to a worse company image: businesses with liquidity difficulties may be blacklisted by counterparties and struggle to establish cooperation. Proper liquidity management is therefore essential for economic stability.
What affects financial liquidity?
Many factors affect liquidity and require continuous monitoring. Losing control of individual activities can quickly affect company finances.
Selected factors include:
● overall debt levels – bills and invoices to pay,
● operating costs – high costs reduce profits and available funds,
● sales and revenue – directly affecting liquidity,
● inventory – excessive stock limits available funds, requiring proper inventory management,
● debts – high financial obligations limit cash for current needs,
● cash flows – delayed customer payments or excessively long payment terms affect liquidity,
● credit policy – relevant to firms offering customer credit, for example overly lenient terms,
● taxes – overpaying taxes also affects liquidity,
● external factors – market changes, economic slowdown, commodity price volatility, legal changes, the economic situation associated with COVID-19, and more.
Effective liquidity management requires constant control of all factors affecting available funds. When irregularities appear, plan and implement changes to improve liquidity.
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How do you manage liquidity effectively?
If your company struggles with liquidity, the problem will not disappear overnight. Find the cause and implement corrective measures. An external chief financial officer can identify problems and how to resolve them. Cooperation should be long-term and focused on establishing and monitoring company goals. Below are examples of liquidity management strategies and tools.
Cash flow forecasting
Regular cash flow forecasts monitor future inflows and expenses, identifying cash shortage periods early and enabling appropriate action.
Shorter payment terms
Negotiating shorter payment terms with counterparties supports liquidity. An alternative is factoring: selling invoices to an external company to receive cash sooner. The factoring company receives payment when the customer pays, allowing longer terms.
Inventory management
Excessive stock ties up capital, so continuously analyse inventory against actual demand and optimise it.
Diversifying funding sources
Depending on one funding source risks liquidity. Consider different methods: loans, factoring, leasing, bond issues or an external investor.
A tax audit
Changing rules encourage tax overpayments. A professional tax audit checks previous tax settlements and identifies overpayments. Tax advisory services can also help obtain individual tax rulings.
Monitoring and controlling costs
This strategy identifies and eliminates unnecessary expenditure threatening liquidity. Optimisation frees up additional funds.
Funds for unforeseen expenses
Every company should maintain a rainy-day reserve. Some events cannot be predicted: pandemics, equipment failures, fire or floods are among the hard-to-identify factors affecting the economy. Setting aside funds for unforeseen expenses can nevertheless protect the company.
An overdraft facility
A credit line or overdraft is short-term financing available during liquidity difficulties. It can serve as an emergency option and reserve funding source. An overdraft is a more advantageous banking product than a loan because interest applies only to the amount used, not the entire available credit line.
Liquidity management – where can you find help?
If you need liquidity management support, contact our accounting firm. We have helped many clients obtain liquidity funding from government programmes and support entrepreneurs seeking business, financial and tax advice in our daily work. We teach how to improve liquidity and profitability and provide current financial indicators supporting sound decisions.
We offer comprehensive advisory services and support from an external chief financial officer. We will identify barriers to financial stability and plan long-term action including emergencies such as market volatility.
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