10 Best Practices that can Increase Your Business’s Liquidity Ratio
Is your company troubling with its ability to payment of bills as they come due? Increasing liquidity often means increasing cash flow so that businesses will have sufficient cash in paying off current liabilities. The rising concerns of solvency often guide business management for improving liquidity through various approaches. This article is aimed at acknowledging businesses of the best practices for increasing their liquidity ratio. As a valuable measuring scale for potential investors and market analysts for the establishment of stability of businesses and checking business health in paying off debts and outstanding liabilities without missing the due dates. Lower liquidity ratios often infer a business’s financial trouble and a significant requirement that business management requires more focus on safeguarding liquid assets instead of proper funds for business growth. A low liquidity ratio is a major cause of concern where a business is being incapable of converting its assets to proper cash fast enough. Buying and selling credit every time disrupts the whole supply chain, unexpected expenses, and unfortunate emergencies. OURS GLOBAL’s Financial & Accounting services help businesses in the examination of their capability in covering short-term financial obligations. Suggesting businesses with effective strategies for fostering their capability in converting assets into cash, we help businesses in overcoming financial challenges, securing loans, and planning their financial future.
Following are the Best Practices That can Increase Your Business’s Liquidity Ratio:
1. Assessing Overhead Costs for Opportunities
Businesses must objectively evaluate time to time expenses such as rent, utilities, professional fees, marketing, etc that opens up opportunities for skillful ways in cutting down the costs. With regular analysis of each requirement, businesses can employ effective practices. With varying situations, assets, coverage, and shrinking insurances over vehicle, liability, & business insurance, businesses can always find themselves eligible for discounts. Being cost-effective in travels by renting instead of buying equipment will reduce overheads. Avoiding unnecessary expenses will cut down short-term expenses and maximize the amount retained in the business.
2. Proactive Management of Accounts Receivables
Proactive collection of accounts receivable improves liquidity. Contacting credit customers and offering discounts will ensure prompt payment. Quick submission of invoices to the customer base, paying close attention to aging accounts and guiding staff to collect past due debts improve the whole process. Businesses must also focus on newer accounts and upsell existing accounts. Businesses can improve cash flows by focusing on their accounts receivables. Late paying customers can also be subjected to credit hold, more strict credit limits, COD, and litigation.
3. Avoid the Hassles of Useless Assets
Selling of unrequired assets can boost liquidity and can be used for reducing current liabilities ranging from short-term debt obligations to property tax bills, maximizing solvency. But there are always assets that are not worth anything in the market and it is better to dispose of them.
4. Utilization of Idle Funds
Unproductive assets such as land, machinery, equipment, vehicles, or office machines, any surplus assets can’t be taken as potential cash. Such resources will further waste resources without any further earning. Investing such idle funds in liquid assets improves liquidity with earning interest. Sweep accounts offered by banks and financial institutions generally link multiple accounts together, such as a checking account the business uses for payment of regular bills and an interest-bearing account like money market funding. But businesses must ensure in maintaining minimum money in the market account and immediate access to somewhat limited funds.
5.Restructuring of Business Debt
Businesses with a considerable amount of debt must restructure their debts from time to time. Working side by side can improve the solvency of businesses by modifying loan terms for minimizing monthly payments and maximizing the business’s current cash flow. Extension of time in invoice payment will also temporarily increase the cash on hand. Renegotiating with suppliers to extend the net terms will give businesses a much longer period for payment.
6. Prompt Invoice Submission
Quick submission of invoices to customers will increase the accounts receivable and makes sales much faster, much better than the current ratio ensuring much cash in hand. Businesses must also focus on aging accounts and make better plans for customers to pay. Settling liabilities much faster especially minor ones that don’t have much monetary value. Efficient receivables processes help businesses in the right direction.
7. Shifting from Short Term Debt to Long Term Debt
Shifting from short-term debt to long-term debt helps businesses with smaller monthly installments and minimum interest rates. With the omission of short-term debt, businesses can also ensure to have better Quick and Current ratios and allows them to save some of the liquidity in the near term and later assigning for better usage.
8. Sweeping Accounts
With sweeping accounts, businesses can earn interest on any excess cash balances by transferring the funds into an interest-bearing account whenever this fund is not of further use and sweeping them back to operating account when in requirement.
9. Reviewing Profitability
By reviewing the profitability of the products and services, businesses can also assess an increase in prices on a regular basis for maintenance or increase of profitability. With the increase in costs and changes in market conditions, businesses can also adjust the prices accordingly.
10. Proper Check-up for Personal Withdrawals
Business owners must always assign efforts in monitoring the amount of money that is being taken out f business for the non-business purpose such as owner’s draws. Ensuring in taking not too much money can lead to undesired cash drain for the business.
Thus as noted above are the ten practices that can improve liquidity ratios of businesses. Improvement of liquidity ratio of businesses in the long term can help businesses in taking a look at accounts receivables and payables. Ensuring invoicing customers much quickly and checking on their timely payment will ensure businesses have longer payment cycles much beneficial for the businesses who are aiming to improve their liquidity ratios. By negotiating for longer payment terms with certain vendors, businesses can also ensure fruitful results. A business’s capability in paying off its obligations is a clear indicator of its financial health. The capability to pay expenses and paying down debts through the profits it generates from its business operations and efficient use of assets helps in success and growth. OURS GLOBAL’s Finance and Accounting Services helps businesses to pay off their liabilities, cut down costs, incorporate long-term financing, and ensure effective management of receivables and payables. Ping us right away and ensure the management of assets effectively for the growth of the business.
