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Improve your company's liquidity using these six methods!

by , 15 April 2015
There are several ways you can improve your liquidity and today we selected one of the most common means regarding this procedure.

Read on to discover what it is.

Here are the six ways to improve your liquidity:

1. Review your stock options and save

Assess stock turnover rate and ask yourself the following questions:

• Are you holding onto your stock too long?
• Are you stocking too much at a time where it isn't sold quick enough when sales are not high?

Use this ratio to determine your answer:
Stock turnover rate = (Total costs of sales (as per income statement)/Total inventory (as per statement of financial position)) x 365 days

The stock turnover ratio is subjective to the industry the company operates in. For example a stock turnover rate of 30 days is too high for companies in the fast moving consumer goods industry.

Buying stock in bulk may earn the company discounts and save costs. Stock turnover rate can help determine the appropriate stock levels and help the company see what stock levels they can buy and hold.

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2. Keep it simple and go back to basics

Bear in mind that cash flow problems can start when a company grows too quickly and doesn't have the cash flow to fund the growth. It's a good idea to go back to the drawing board and make sure your plans for growth are sustainable.

At this point, you need to ask yourself if your plans are achievable with the current developments. You have to review your core business and make sure you get the systems and procedures in place to facilitate and assist your cash flow situation.

3. Review members and shareholders drawings

Keep in mind that in many cases business owners draw a lot of money without realising it. This might cause cash flow problems. Note that you can plan for this properly if you add the drawing to the cash flow budget. Include the members and shareholders in the payroll. This ensures you treat the money properly for tax purposes also. It also alleviates cash flow problems and ensures the business gets this expense as a deduction for income tax purposes.

4. Make sure you bill on time

You should know that a lot of times businesses experience cash flow problems because the owner is also responsible for all administrative and operational functions of the business. Booking isn't done timeously and thus statements aren't sent to customers on time to effect payments. Customers need to be billed and notified of payments due timely to stabilise flow of funds into the company.

5. Don't be the cause of the delay, capture regularly and on time

This means that you must ensure you have accurate up-to-date information to base your decisions on. Then use your accounting systems reports and prepare your cash budget. Once you've done this, you can do your liquidity calculations to see what your liquidity is.

6. Sell your debtors book

Keep in mind that you can also sell your debtor's book at a discount to ensure you receive cash flow fast. This is called debt factoring and you can approach commercial banks and financial institutions to do this for you. The institution will generally access your debtors to see the quality and ability for them to pay. They will then calculate an amount at discount and pay it to you upfront when they take over collecting your debt.

PS: If, despite following this method, you keep finding yourself in a cash flow/liquidity problem, you consult a specialist to help you.

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