The importance of liquidity

I spend my life working closely with businesses helping them to achieve their short, medium and long-term ambitions.

Inevitably, we talk a lot about revenue and profitability, but often more important than either of these is liquidity.

Without strong working capital, it is hard for a business to move forward. There is a lot of truth in a couple of old business sayings: “Cash is King” and “Happiness is a positive cash flow”.

Most businesses which fail do so because of a lack of business liquidity – i.e. expenditure on costs and capital items exceeds receipts from revenue sales and capital disposals.

Merely having just enough cash in the business is no guarantee of survival either. All it requires is the unexpected loss of a loyal customer or a bad debt or an unforeseen business expense and the fragile liquidity balance of a business can tilt dangerously.

A business is no different to a family in that it requires a financial cushion to give it much needed security and peace of mind in unstable times.

We are just emerging from one of the most difficult recessions in history. The businesses that are coming through best are the ones which have managed their cash flow successfully. This meant keeping a tight rein on business expenses, maximising margins through efficiency improvements and maintaining customer bases.

An accountant provides greater value where they do not just dip in and out of your business once or twice a year. It is not about the annual preparation of a detailed set of accounts. Instead, the team at Phillip Bates & Co build relationships with clients – often over the lifetime of a business.

Only by having such close and trusted relationships, can a business owner and his management team get maximum value out of their relationship with a professional adviser.

By determining and monitoring the key performance indicators, in other words looking at the numbers of a business, on an ongoing basis and speaking regularly with the management, we can track and anticipate trends around liquidity and working capital.

For example, we may spot that a business is carrying too much stock, much of which is sitting on a stock-room floor for weeks on end – something that can drain cash from a business.
Another major issue for businesses, one that worsened considerably during the recession years, is customers looking to extend payment terms on suppliers. We can help provide clients with advice and tactics to weather such a storm.

A number of businesses we work with are in the manufacturing sector, where smart tweaks to production processes can often help improve the cash flow of a company.
It is important that businesses do not confuse cash flow and profit. If a company has a rapid growth in credit sales, profit could dramatically exceed cash received, exacerbating a company’s cash situation.

Without cash in the business, the company’s liquidity – i.e. its ability to meet short term obligations – is placed under enormous pressure.

If a business has up to date accounting and is properly tracking its cash flow position, it means it has the ability to tackle potential icebergs sooner rather than later. Poor accounting practices can mean a problem goes undiagnosed for many months, by which time it will certainly be more costly but it may also be too late.

For a free, initial consultation, please call Phil Bates on 0151 353 0003

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