Behind what could seem like a bunch of numbers and metrics, lies the beating heart of any business – big or small. It all comes down to transactions, growing your income and cutting down on your costs; investing and saving; meeting your duties in time and collecting your rewards. Assets and liabilities.
Why Should You Care About This?
Liquidity and cash flow management are far more than economic theory. Even if you are intuitively doing well – like many of small and start-up businesses do – you should still reconsider learning more about this core economic principles so you can make well-informed and wiser decisions.
In many cases, decisions regarding liquidity and cash flow are make-or-break kind of decisions that are crucial for the future of a business, especially when it comes to small businesses and early stage startups.
If you’re new to the whole thing, we suggest to go through some articles explaining difference between cash flow and free cash flow, or differences between cash flow and liquidity. If you already have (a basic) understanding of these terms, we have prepared tips to keep your business as liquid and your cash flowing in!
Know Your Goals and What You Want to Achieve
Cash flow is always good, but for a company to be successful liquidity is crucial. You can have tons of cash flowing in, but if your liabilities are higher – you won’t be liquid and that can pretty much be the end of your company on the long run.
It is important to know what your goals are, and stay focused. Some of the things to think about are:
- Profit margin. Of course, you should scale, but if you don’t actually earn more, but barely cover operational costs of growing your business, the whole thing doesn’t have much of a point.
- Costs. Assessing your overhead costs and looking for any opportunity to decrease them.
- Unproductive assets. If you are storing assets without using them to make money, you should simply get rid of them. However, when equipment, office space and buildings make sense, it’s always a smart investment and you can look also for mortgage loans that make it possible to purchase buildings or office spaces to grow your business without having to pay too much money upfront.
Accounts Payable and Accounts Receivable
Long story short, accounts receivables equal the money you will get paid, while accounts payable equal the money you will pay. The goal here is to keep as much money as long as possible so you can invest, support your operations and keep being liquid.
Make sure you’re billing all your clients properly and getting paid promptly. Try to negotiate longer payment terms with your vendors as well. Extra tip: Did you know that you can sell accounts receivable to a factoring company so that you get money for the invoice that is due in 3 months right away. This is pretty common and it’s called factoring, but keep in mind that the company buying also takes a certain percent, so you should decide what is important for you: more money a bit later or a bit less money now.
Hope for the Best, Prepare for the Worst and Build a Resilient Business
You should always try to accumulate enough cash so that your business doesn’t fall apart if a payment is late or there are unpredicted costs.
You should definitely have a positive attitude and be brave to take chances – that’s the “hope for the best” part, and all entrepreneurs and business owners need to believe in their idea and success. But you should also be as prepared as possible for any unpredicted circumstances.
When you look at things like this, we could say that good liquidity and cash flow are the keys to resilient businesses.
Keep your goals in mind and always try to advance! Now that you know the deal with liquidity and cash flow – do you have any ideas on how to improve on something? Please share it with everyone in the comments!