Managing Liquidity in Business

 

Even though the global economy is tilting towards being cashless, the real goal is not to be actually “cashless.” I think the real word is “paperless”.

 

As an entrepreneur, cash is actually king for your business as it dictates operations and continuity of your business.

 

Drawing from personal finance example, you know what happens when you are broke.

 

All wants and needs remain unfulfilled since there is no resource to satisfy them.

 

Likewise in business, the lack of cash means being unable to pay bills such as your rent, salaries, fuel.

 

You also can’t tap into opportunities.

 

Imagine one of your suppliers giving a discount for purchases within a limited time window.

 

If you are able to tap into that, you will be saving cost in some ways but if you don’t have cash, that opportunity is gone.

 

The age-long defined reasons for holding money still remain valid.

 

WE HOLD CASH FOR PRECAUTIONARY REASONS

 

This is what I define as emergency fund. As business owners, it is important to set money aside for emergency needs especially for business concerns and situations you don’t have an insurance for.

 

WE HOLD CASH FOR TRANSACTIONAL PURPOSE 

I think this is the core reason for holding money. This covers day-to-day business expenses. It could be anything, re-occurring expenses majorly.

 

WE HOLD CASH FOR SPECULATIVE PURPOSE

Like the example I stated earlier, this covers funding of opportunities that will help you to save cost or bring in additional revenue.

 

Good ways to better liquidity management are by:

 

1. Highlighting your major expenses and learning to prioritise them.

Personal finance can be closely linked to business finance.

 

This is the same way you learn to control your expenses by suspending your cravings or wants to a later time. De-pioritised expenses can also be moved to a later time.

 

2. Budgeting

Learn to prepare a budget and stick to it. The place of budgeting can never be overemphasized. You can read our previous post on Budgeting for Businesses as a guide.

 

3. Learning to diversify

Yes, investing and speculative opportunities are good but don’t put all your cash in investment!

 

Sounds ironic right. I am a pro-investment myself but what’s the point of investing if you have to borrow money to sustain yourself?

 

So a solution is to diversify.

 

Learn the various types of investment opportunities and order according to your anticipated needs.

 

For example, we know that Tbills are more liquid than land and a call account savings with a bank is even easier.

 

All you need to do is to draft a mail that to your bank branch that you need your money now.

 

4. Monitor your cash balances

Don’t be caught off guard. For a business, I usually suggest a daily check of your bank balances, petty cash wallets and vaults.

 

Being in the know of your cash position will also be beneficial as you would be able to make plans ahead before any need will arise.

 

That’s all we have for you today on business finance.

 

We hope you find it insightful.

 

Please leave a comment, question or share your cash management experience with us.

We would like to hear from you.

 

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