As the business owner, you're the master of your financial budget, cash, financial operations, financial plan and so on. This means there are always tasks you have to perform on a regular basis and aspects to manage and review.
When it comes to the amount of cash your business has to deal with, there are several facts you should check to make sure you can improve the liquidity position.
Let's look at the five factors that influence your liquidity and that you should be reviewing:
Five factors that influence a business' 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
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. Review from the very beginning
Never forget that cash flow problems can start when a company grows too quickly and doesn't have the cash flow to fund the growth. And this is why at this point you should go back to the drawing board and make sure your growth is sustainable.
Check to see if your plans are achievable with the current developments and 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
Sometimes, business owners draw a lot of money without realising it and this particular behaviour may lead to cash flow problems. To avoid this scenario, 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'll 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're responsible for all administrative and operational functions of the business but oftenbusinesses experience cash flow problems because booking isn't done timeously and statements aren't sent to customers on time to effect payments. Customers need to be billed and notified of payments in a timely manner to stabilise the flow of funds into your company.
5. Don't be the cause of the delay, capture regularly and on time
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.