Finance & Accounting Financial Reporting

Essential Tips to Improve the Liquidity of Your Business

At a time when more and more companies have to file for bankruptcy due to a lack of solvency, the liquidity of a company is of decisive importance. In order to avoid bankruptcy, there must always be sufficient means of payment in a company in order to settle the liabilities due. However, it cannot be a corporate goal to pay the maximum amount of money, as this conflict with the ultimate corporate objective of maximizing profits due to the lack of interest. Rather, the maintenance of liquidity is an important secondary provision for the objective function for the maximization of the profits of the company.

So how exactly do you improve the liquidity of your company? Well, there are certain measures that you can take if you are concerned about just how well you are to do in terms of improving the solvency of your business. If you want to increase the cash that you have on hand at all times to pay off any outstanding obligations, then you can try to increase the liquidity ratio of your business. And there are a few tips that can help you do just that! In this article, you can learn everything there is to know about making your business more liquid.

Try Partial or Instalment Payments to Vendors

Use today, pay off easily in monthly installments: what applies to consumers can also save the liquidity of your company. But be careful with several simultaneous partial payments: the installment increases their current financial obligations. And you have got to be sure that you have got an accountant that is working for you to ensure that you can pay off the current interest rate of all of your payments. This is because increasing amounts of partial payments can rack up pretty quickly, and you may end up having to pay more in the long run if you do not manage partial payments properly.

Lease Property or Equipment

For larger investments, check whether you can lease machines, buildings or IT components. As the lessee, you are granted the right to use the contract, while the property remains with the lessor. Review a sale-and-lease-back process to create liquidity. For example, you sell a building or a vehicle to a lessor and lease it immediately to continue using the property.

Try to Extend your Credit

In the case of liquidity problems, do not use the discount for early payment of the supplier. On the contrary, negotiate with the supplier to extend the payment terms and pay as late as possible. Check billing dates: Suppliers often make their bills unreasonably early. Try to act in that all invoices can only be made after full delivery, not after a partial delivery.

Advance Client or Customer Payment

To advance payments, you can offer your customers so-called discounts. This kind of offer is a discount on the invoice amount that is granted if your customer pays within a certain period of time. As a rule, the discount rate is between two and three percent. That way, you can motivate your customers to pay the bill faster and get your money sooner. The sooner that your customer pays them, the more cash that your business will have in hand.

You also have the option to ask your customers for a deposit on the purchase price. Although you do not receive the entire purchase price immediately, you can pay your own outstanding liabilities with the down payment.

It can also be helpful if you arrange direct debits with your customers. Thus, the bills are usually paid faster than would be the case with an independent transfer of customers or via a bank.

Get Rid of Any Current Debt

Invoice without delay, agree to clear payment terms and payment conditions and urge them to comply. Conduct a friendly but consistent reminder system with short and fixed reminder cycles and charge reminder fees. In each dunning stage, set a clear deadline for when the amount due should arrive in your account. If your service extends over a longer period of time, provide the customer with down payment or partial invoices. For larger new orders, check the creditworthiness of your customer or have your customer claims insured against default.

Keep Track of Current Financial Obligations

Only what is known can be changed. Pay special attention to the most accurate and traceable success and liquidity planning. During the course of the year, perform regular target or do actual comparisons to identify additional capital requirements in good time.

Downside and Reduce Costs

Every penny saved strengthens liquidity and increases profits. Regularly negotiate the prices with your suppliers and also get competitive offers. If you just work on reducing costs, then you may be able to ensure that your company has always got more cash on hand. Just be sure that the costs that you are getting rid of are non-essential to your company. And make sure that you are doing the correct cost-cutting measures. This is because if you are not careful about reducing costs, then it may come back and actually affect your business negatively. For example, one way to effectively reduce costs is to outsource the bookkeeping service of your company, because it is a cheaper way to handle the financial and accounting activities.

The measures outlined here are in principle suitable for bridging short-term liquidity bottlenecks. However, it should be noted that while most of the measures will improve liquidity at the time of the liquidity shortage, they will increase the liquidity burden in the future. Therefore, these measures only make sense for companies with positive earnings prospects.

Of course, to take account of the above measures, the liquidity of your company must first be measured in quantitative terms. So that you can use those measurements to check if you can truly improve the liquidity of your company. Specifically, what this means is that you may want to try and do a bit of number crunching and inspect your books and financial records. This is just to make sure that your company’s assets are all accounted for.