How to Increase Liquidity
All businesses need to maintain a certain amount of cash or cash equivalent reserves to fund ongoing operations and pay short-term obligations. This cash reserve is often called liquid reserves, and maintaining sufficient reserves, or liquidity, is an important task of the management of a business. Some businesses do not require a great deal of liquid reserves due to the nature of the business (low overhead or a 100 percent prepayment business model), but most companies need to keep a significant amount of liquidity, and maintaining liquidity can be a major issue at times for capital intensive businesses that extend a lot of credit to customers.
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Lower your overhead. Try to get a reduction in your rent or consider moving to a less expensive location. Ensure you are getting the most bang for the buck with your advertising budget. Reduce your need for expensive professional consultants and take care of some the work in-house, if possible.
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Sell unproductive assets. Many companies have unproductive, currently unused assets just lying around taking up storage space. Assets like old computers, servers and copiers, outdated production equipment and even storage locations and closed branch offices can be sold to raise cash and create liquidity.
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Improve your accounts receivable and accounts payable procedures to collect your money sooner and keep it longer. Carefully monitor your accounts receivable and make changes where necessary to expedite collections. Also consider negotiating longer payment terms with your vendors so you can hold on to your money as long as possible.
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Review your business model and current profit ratios. Find ways to improve efficiency that will lower your overhead and lead to greater liquidity in the long run. Also assess the possibility of price increases for some products or services as more income with lowered expenses will certainly increase liquidity.
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Review your banking and financial services fees and accounts. Make sure that all funds are kept in interest-bearing accounts at all times, and that you are not paying excessive fees on any accounts.
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Examine your company's financial statement six months after instituting the various changes to improve liquidity. A company's current ratio is commonly used to measure liquidity. The current ratio is determined by dividing current assets by current liabilities and, according to "Entrepreneur," a general rule of thumb for businesses is to maintain a current ratio of 2-to-3.
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