Liquidity is one of the most important things to consider for the growth of the business. There are two terms in the business-Liquidity and bankruptcy. These two terms are on the same number line but on opposite sides. Thus, it is imperative to keep the business on the side of the liquidity. It is imperative to maintain a balanced cash flow in the business. On the other hand, high liquidity indicates bad cash management.
Liquidity ratio is a perfect way to measure the liquidity in the business. There are different ways to examine liquidity ratios in a business, such as the current ratio, quick ratio, etc. You should keep an eye on all these ratios and put in continuous efforts to optimize these ratios. If all these factors are maintained properly, then it will lead to optimum business operation. The business owner who wants to have short term loans then it imperative to maintain optimum liquidity ratio.
Tips to Improve the Liquidity Ratio
There are various different methods to improve the liquidity ratio. Some of the innovative ways are described below:
- Get Rid of Loss-Making Products
If you want to implement this trick, then you should start with analysis. It is imperative to analyze each product before eliminating it. You should do analysis in terms of margins and volume. The products that are responsible for the loss in the business should be completely eliminated. According to the experts, optimum product sales can generate high profits in the business.
- Generate Invoices
You should timely send the invoices to your customers. If you send invoices soon, then there is a high probability of getting the payments at the right time. Some business owners do not follow the invoice discipline. It is imperative to raise on-time invoices to maintain the cash flow in the business. It is recommended to invest in accounts receivable solutions to get timely payments from the customers. This software can generate accurate invoices and automatically send it to your customers without delay. This software will also reduce the burden on your workers.
- Transparent Credit Terms
The credit terms and policies should be transparent to avoid any problem later on. The credit terms and policies should be available in the written agreement. Also, this agreement should be signed by both parties. The written policies would be applicable to both liquidity providers and liquidity users. The written agreement will prevent you from various legal troubles of account receivables.
- Forecast the Cash Flow
Cash flow forecasting will also help the business owners to make the right decisions. Appropriate cash flow prediction can help in optimum cash management. Moreover, it helps in deciding the level of cash. The cash prediction and ar collection software available in the market can help in making appropriate predictions.
All business owners should also do sensitivity analysis so that they can get to know about the debtor’s obligations, discount, etc. It is imperative to keep an eye on the availability of the funds. Usually, the bad debts are provisioned at the end of the year but forecasting should be done on a weekly, quarterly, or monthly basis.
- Take Help of Insurances
The outstanding invoices will drag the business towards the end. Thus, you should never let the outstanding invoices grow in number. Sometimes, the big customer becomes insolvent, and they fail to make payments. In this case, the company can go into a big risk. This is a credit risk, and it is important to take insurance for debt protection. The finance controller in your business should take care of all these things and make sure that the company does not face any receivables credit risk. Taking insurance policies will not generate more revenue but prevent you from the risk of going bankrupt.
- Finance Assets from Long Term Resources
If the present assets are financed by long term sources, then you can save money. When the business owners opt for long term finances, the cost of financing is low and reduces the cost of interest. On the other hand, if you opt for short term finances, then interest on short term borrowing will be high. The long term resources can help in maintaining optimum cash flow in the business.
- External Services and Optimum Management
The tricks and tips that are discussed above can be managed by internal resources. On the other hand, there are some resources that should be managed externally. There are some service providers who help in improving the liquidity in the business. All business owners should opt for a factoring technique. The factoring is a kind of service in which the debt of your business is collected by the financial institutions.
Liquidity is a very important thing to consider in business growth. The above-mentioned tips will help you to maintain the optimum cash flow in the business.