Methods To Improve Your Company’s Liquidity Ratio
Added on April 20, 2018
A Two Part Series – Part One of Two
The liquidity ratio or current ratio is a measurement of your company’s ability to pay off all of its debts by utilizing its current assets. The formula is: Current assets divided by current liabilities. In essence, liquidity is your business’s ability to pay its bills as they come due. The liquidity ratio is a valuable measuring stick for potential investors and market analysts in helping to establish how stable the business is and is it healthy enough to pay off debts and outstanding liabilities as they come due.
Liquidity ratios that are on the lower side are a sign that the company is in financial trouble. A significantly high liquidity ratio may be an indication that management is too focused on protecting liquid assets instead of using the proper amount of funds to grow the business. It is a delicate balance to say the least. That being said, if your company’s liquidity ratio is low, it is a major cause for concern. Your organization may not have the ability to convert assets into cash fast enough, or you do not have the means to buy and sell assets without negatively affecting their value. You certainly need cash to run your company.
You cannot count on buying and selling on credit at all times; there are short-term obligations that need to be met with cash. For example, suppliers and vendors may not be willing or able to wait long periods of time for their payments. You cannot afford to have them interrupt the supply chain in any manner. What would happen to the health of your company if you were not able to pay interest and or principal on bank loans? Your company will always face unexpected expenses and unfortunate emergencies. As the old saying goes “cash is king.” The following advice will help you improve your company’s liquidity ratio.
Focus On Accounts Receivable
In order to improve your company’s liquidity ratio you must bring cash through the door as quickly as possible. While it is important to concentrate on new accounts and up sell existing accounts, the sales cycle can be a long and slow process. The fastest way to improve cash flow is to focus on accounts receivables. The faster you receive payments the better off your business will be. It starts by submitting invoices to your customer base as quickly as possible. You should also pay close attention to aging accounts. Your staff should work hard to collect past due debts by constantly staying in contact with your customers. If customers are not paying on time, you should consider such actions as credit hold, more strict credit limits, COD, and as a last resort - professional collections agencies or even litigation. Most collection issues can be nipped in the bud if you stay on top of your slow payers and delinquent accounts.
Please Stay Tuned For Part Two Coming Soon
Navera Group provides cash management improvement solutions for organizations experiencing a wide range of cash flow issues. Our clients range from having a strong balance sheet to facing a major liquidity crisis. Our team of professional consultants dig in immediately to identify and address the issues that your business may be facing. We realize that visibility and clarity are essential components to alleviating the problem. Navera Group typically begins the process by creating a thirteen (13) week rolling cash flow forecast. During this initial phase of an engagement, we identify the root problem(s) and implement practical strategies to rectify the situation.
If your company is in a growth phase or crisis mode, our financial experts will help you to identify your issues, improve cash flow, and transform liquidity management from an afterthought to a successful business strategy. If you have any questions regarding your company’s cash flow or would like more general information about our array of services, please contact us today. Phone: 617-356-7516; Email: Info@Naveragroup.com; Website: www.NaveraGroup.com