Liquidity – Introduction, Type, Measure, and More

Liquidity Basics

Liquidity – Corporate presentation letters are their financial statements. Through these essential reports, their information can be allowed to show their skill, knowledge, experience, and capabilities in operations to the market and their management and decision making. Liquidity is an essential part of a financial position and is as vital to the company as it is to the cactus factories.

Thus for any company, liquidity becomes integral to its strategic ability to acquire and develop core skills and competencies that allow it to create and deliver different products and services than its competition.

In this way, current liquid assets can provide the necessary cash output to the firm to sustain its operations, i.e. without an adequate level of liquid resources. The firm cannot continue to operate correctly in the future, and time and, therefore, must disappear. In order, the items forming part of current assets are as follows:

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Cash and Banking:

These are essential elements for managing the floating cash recorded by the company. If this liquidity is insufficient, companies may turn to banks offering short-term loans such as overdrafts and Treasury loans to resolve these short-term cash gaps.

Temporary investments:

They allow the company to obtain a return on the cash available to create or receive accounts, shares, bonds or deposits. Banks offer various deposit products at competitive interest rates to the companies in terms of making their temporary investments through profitable savings accounts, fixed deposits etc.

Accounts Receivable:

Matches sales made by the company (portfolio) for which the buyer is given a grace period to pay. Banks offer specialized financial products for accounts receivable management, such as factoring, through which they discount invoices and present the relevant value for the company to collect the invoice on its due date. , This mechanism is a means of generating liquidity for the companies.

Inventory:

Matches the stock of goods available for disposal in the ordinary course of business and is recorded according to the state of manufacture (in transit, in process or finished). Banks offer credit products, called working capital, to suit inventory financing needs.

Other Current Assets:

It corresponds to current assets other than the above and can also be converted into money in the short term. Banks offer financial products adjusted for the acquisition needs of other existing assets, called working capital.

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Liquidity Type

The degree of liquidity is not always the same within fixed and current assets. Thus, we can find the property:

Liquidity – In the long run:

It takes a long time to convert to money and can cause losses. A typical example is a building.

Liquidity – Medium Term:

Refers to assets that can be converted into money within one to four months, for example, stocks in mutual funds.

Instant:

They allow quick access to funds, such as funds in checking accounts.

Advanced:

It means allowing access to necessary funds that are not directly related to the company, such as a loan or credit card.

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Tips to Overcome Liquidity Crunch

• We are incorporating a company with capital over the legally required minimum to obtain immediate liquidity in case of need.
• Conduct an audit to determine the company’s liquidity needs in a timely manner and define a strategy for disposing of funds when the time is right.
• Control the locker area well to keep money going in and out.
• Know your customers well to avoid the risk of dealing with a criminal.
• Renegotiate terms with suppliers.
• Set a due date for bill payment and take immediate action in case of non-payment when the price expect.
• As you have seen in this article, it is necessary to have liquidity to meet short-term commitments.
• Financial education is the best tool that your business is always in the best possible shape, which will allow you to make financial decisions with maximum peace of mind. So, invest in yourself, allow yourself to be mentor by a financial educator, and it will be easier for you to achieve your business goals.

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How do you Measure a Company’s Liquidity?

To find the level of liquidity in your company, you need to subtract financial income from company expenses and the amount you receive from company expenses and liabilities. It is essential to consider that the higher the income or sales, the more cash can obtain.

Here are some tips suggest by Factor do to improve your company’s liquidity:

1. Keep an Emergency Fund

It is usual for companies to find themselves in short selling periods. Though the ideal solution is to face them, we recommend that you be prepared to meet these challenging times and create a provident fund from months of profits with more liquidity. Could you do it? Face the ones where there are more difficulties.

2. Financial Control

It is advisable to use tools to control Treasury rhythms that reflect cash flows and determine how, when and where payments or collections should be made. By keeping this record, you can do financial planning to help you know the right time to make purchases and keep track of overdue bills, among other things.

3. Customer and Sales Management

Knowing the details of your customers is essential to reducing the risk of non-payment and bad loans. Attracting clients providing immediate liquidity to your company’s funds is a more appropriate to avoid long collection periods.

4. Negotiation with Suppliers

Seeks to improve and standardize payment forms and terms so that they are suitable for you. Get better terms and renegotiate purchase terms and prices.

5. Use Invoice Discounting or Factoring

It is a recommended financing option for businesses with liquidity problems because, with platforms like Factor, you can receive your bill payments instantly and thus avoid waiting for 120 days or more.

Factoring is an ally of businesses because, by accessing resources quickly, you have the opportunity to reinvest them, build new business, increase customer and sales portfolios, take advantage of discounts with suppliers and negotiate better terms.

Having sufficient liquidity allows companies to pay for the production process and maintain its operation, so maintaining excellent liquidity in your company is very important.

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Conclusion

Liquidity in a business is the ease with which an asset can convert into money. In other words, your company can receive cash.

It is important for the proper functioning of your business. A lack of liquidity can have severe consequences for you. As it causes a shortage of liquidity to pay your company’s obligations, such as salary payments, essential services, etc.

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