How to Improve Liquidity
To increase liquidity means increasing your business's cash flow, often so that cash on hand is sufficient to pay current liabilities. When solvency concerns arise, management can improve liquidity through various means. Restructuring debt, utilizing idle funds and reducing overhead are three possible means of increasing cash. Cutting back on small expenses, selling unneeded assets and collecting outstanding accounts can further improve a liquidity ratio.
Businesses that carry a significant amount of debt must service these obligations on a regular and timely basis. One of the ways to improve solvency in a business includes working with lenders in modifying loan terms to reduce monthly payments and increase the business’s current cash flow.
Extending time to pay invoices can temporarily increase cash on hand. If you pay suppliers on net-15 terms, see if you can renegotiate to net-30 or even net-60, giving you a much longer period in which to pay. Some vendors also may be open to negotiating rescheduled payment plans.
Utilizing idle funds by investing in liquid assets is one method of increasing liquidity. Earning interest on deposits, while retaining immediate access to the money, can only improve liquidity. Some banks and financial institutions offer sweep accounts. These types of accounts generally link two or more accounts together, such as a checking account the business uses to pay regular bills and an interest-bearing account such as a money market fund.
Remember, though, that many money market accounts require the account holder to maintain a minimum monthly balance, and immediate access to the funds is somewhat limited.
Objectively evaluating regular expenses such as rent, utilities and insurance may provide opportunities to cut costs. For example, a regular analysis of insurance needs is a smart practice to employ. Situations change, assets change and thus coverage needs change.
Contracting multiple types of insurance, such as vehicle, liability and business insurance, through one provider often makes the policyholder eligible for discounts. Be cost effective about travel, and consider whether you could rent instead of buying equipment to reduce the overhead.
An additional means of increasing liquidity is to assess and reduce smaller expenses such as office supplies and equipment. Discount stores often sell basic office supplies at greatly reduced costs when compared with an office supply specialty store. Other small expenses such as $50 a month spent on free coffee for employees could quickly be converted to $600 extra cash yearly simply by encouraging employees to furnish their own coffee.
Collecting funds owed to the business in a timely manner can improve liquidity. If feasible, the business can contact credit customers and offer discounts for paying earlier than usual. For example, you could offer a 2% discount on invoices paid within 10 days.
Whether it is land, machinery, equipment, vehicles or office machines, any surplus assets that the business does not need represent potential cash. Selling unneeded assets can increase liquidity as soon as the transaction takes place. That extra cash can then be used to reduce current liabilities such as short-term debt obligations or property tax bills, for example, improving solvency.