For a company to successfully survive and thrive in the business arena, it is important to preserve capital, maintain liquidity, achieve good returns and of course, effectively manage the risks that the business entity is and will be facing. The same is true for every kind of businesses. And while this act may seem just a common knowledge, it is in fact easier said than done.
Among the most common reasons why companies fail is due to cash flow. While you may be earning a nice profit yesterday, once the cash flow is obstructed by certain reasons, you risk the chance of your business closing up shop.
Cash is a necessity for any business to survive – especially small businesses. This is why it is vital to have control over your cash flow to prevent problems from arising in the future. In uncertain times, problems may arise and while you may have prepared certain measures, you can only be rest assured that you can survive if your business has a reliable cushion and security through having a readily available fund. This can also give you the ability to grab whatever opportunity appears during the time.
Profit and cash flow are two different bodies that most business have hard time distinguishing hence it leads to their businesses failing. And to a large degree, the problem is often attributed to the fact that financial accounting does not focus on cash flow. While these two things may seem like they are the same, the key differences will still be noticeable with proper evaluation, and the most important of which, is timing.
So, what is liquidity and what liquidity solutions can you use to prevent risks?
Liquidity refers to the ability of your business to fulfill short term financial obligations. If your business is liquid, paying for its current liabilities can be easily managed.
For startup businesses, liquidity can come easier and more naturally. This is because it is easy to see if your business has enough cash and is actually solvent. However, once your business starts to grow and your process becomes more complicated, it also becomes more challenging to determine your liquidity.
To solve these kinds of problems, preparing cash budgets six to twelve months prior is crucial. This will help you project the cash needs of your company as well as prepare the needed adjustments when the need arises. Additionally, one recognized solution is to use a lockbox system for payment collection. This can help you put the payments you receive into a bank account that can earn interests. To learn more about liquidity solutions, click here.