Most businesses face cash flow problems. The good news is you can plan for it by monitoring your liquidity. The bad news is, calculate it wrong and you could be closing your business' doors sooner than you think! How sure are you, you're getting this calculation correct?
Today I'm going to stop you from ever getting this crucial calculation wrong.
Read on to discover what this calculation is and how to always get it right...
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Get your liquidity calculation right
Some accountants add profitability in their liquidity calculation. This is a huge mistake! Your bank balance may be in the positive. But making a profit isn't an indicator of solid cash flows. Profit also doesn't show your company's ability to settle its liabilities.
This giant finance blunder will make your business' position look more liquid than it actually is! And could result in you spending more than you actually have. And you might only realise this when it's too late! So, this blunder could quickly be the downfall of your business.
Liquidity isn't profitability. Liquidity means you have enough money to pay expenses; and profitability is the difference between your income and expenses.
Read on to discover what you should include in your separate profitability and liquidity calculations.
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When you calculate profitability you'll include:
· A total sale that may not yet reflect in the bank; and
· An expense you incur even if you haven't necessarily paid for it.
But when you calculate liquidity you'll include:
· An amount (called debtors or receivables) that relates to customers who've received their invoice but haven't necessarily paid; and
· Payments to suppliers that might relate to previous periods.
P.S. Never make another accounting mistake again. Simply ask one of our experts on the Accounting And Tax Club