If you have a company or manage your business as a freelancer, you already know that having liquidity is essential to be able to face your obligations . However, many times you cannot have the money you need and then you have to resort to external financing, which will lead to new outstanding debts and interest.
The best thing for the financial health of your business is to be able to anticipate the lack of liquidity in order to be able to take action on time and avoid getting into more debt. To help you with this, we are going to analyze in more detail everything related to liquidity.
What is a company’s liquidity and why is it important?
Financial liquidity is the ability of a company to obtain cash and meet short-term obligations .
Imagine that you have bought office supplies for your business worth 300 bucks and you have to pay the invoice in 30 days. If you have liquidity it means that you have enough money in your company accounts to make this payment on time.
There is also talk of the degree of liquidity, which is the ability of an asset to become money . Returning to the example from before, imagine that there is not enough in your business accounts to pay the bill, you would then have to resort to selling an asset to obtain that money. You could, for example, sell a laptop that you no longer use, thus turning an asset into liquid money.
As you have already deduced, the true importance of liquidity is that it is what will allow you to face the payment of business debts.
Classification of assets according to their liquidity
They are those that can be converted into cash in a short period of time (never more than a year). Here we find assets such as money in checking accounts, shares or business notes.
They are assets directly linked to the activity of the company and have the vocation of permanence in it . They can be sold and converted into liquid money, but generally their sale involves a more or less long period of time . The most common examples are the property in which the business is installed or the machinery used in the production of goods.
Types of liquidity
Within current and fixed assets the degree of liquidity is not always the same. Thus, we can find assets:
- Long-term : they take a long time to turn into money and can even lead to losses. The typical example is a property.
- Medium-term : refers to assets that are convertible into money within a period of one to four months, for example shares in investment funds .
- Immediate : they allow access to money instantly, such as money in checking accounts.
- Advances: means that allow access to the necessary money and that do not belong directly to the company, such as a loan or a credit card.
Tips to overcome the lack of liquidity
- Set up the company with a capital that is higher than the minimum legally required in order to have immediate liquidity if necessary.
- Carry out an audit to detect the company’s liquidity needs in time and be able to define a strategy to have the money available when the time comes.
- Control the treasury area very well to keep up to date with the money that comes in and goes out.
- Know your clients well to avoid the risk of working with a defaulter.
- Renegotiate conditions with suppliers.
- Establish a deadline for the payment of invoices and take immediate action in case the payment has not been made when due
As you have seen throughout this article, having liquidity is essential to be able to face short-term obligations. The best tool you have to ensure that your business is always in the best situation is financial education , which will allow you to make financial decisions with the greatest peace of mind.