Business Liquidity Definition
The liquidity of a company refers to how easily its assets can be converted into cash. Some assets such as current accounts or bonds are very liquid as they can be converted to cash in a matter of hours or days while others are less easily convertible, such as property or equipment that would need weeks or months to sell.
Business liquidity management is fundamental for companies as generating cash quickly allows them to face sudden cash deficits or pay unexpected bills or debts, but also run their operations and potentially expand their business.
Many factors can influence the liquidity of a company. For example, overtrading – when you sell more than you can make or can afford to produce – could alter your liquidity if you don’t have sufficient resources. Losing one of your biggest customers could also have a massive impact as it would reduce your revenue. If you can’t convert your assets into cash quickly, you may struggle to pay your bills and you may become insolvent.
First, complete the fields to reflect your current situation without taking into account the impact of any external negative factors:
To go further and see how external factors could impact your business liquidity, you can now test out various scenarios.
All you need to do is to complete or modify some of the fields to simulate the potential impacts of reduced turnover, losses, drops in sales, unpaid invoices or payment delays on your liquidity.
For example, ask yourself these questions:
Monitoring where and how money is spent is important when managing the liquidity of a company. Making cash flow forecasts can help your liquidity management and avoid having to look for emergency solutions to prevent financial distress.
If you are concerned and wish to secure your cash flow, trade credit insurance remains the most complete and reassuring solution to support your credit risk management and commercial development.