Why liquidity matters (plus ways to improve it)

As a business owner, you’ve probably heard that cash is king. While other aspects of business ownership are important, liquidity (or cash on hand) is crucial to any successful business.

And where you keep your cash is also significant. You want it to be safe, secure and working for you.

But there’s more to liquidity than simply having a checking or savings account.

What is liquidity?

Cash on hand refers to the amount of money you have available to use immediately.

It includes physical currency, like dollar bills and coins. But it also includes funds that are easily accessible in your checking and savings accounts—anything where you can draw funds to use within a few days.

This amount of cash you can tap into at short notice is known as your liquidity.

The key is being able to convert your assets or security into cash quickly and easily without affecting its price. The more liquid your business, the more access it has to cash—and the easier it is to meet urgent financial obligations.

Business money market accounts offer flexible access at a higher return >

Benefits of high liquidity

High liquidity could help your business in several ways:

Urgent needs

Cash reserves could help you manage sudden threats. What if you need to cover your working capital in an unforeseen crisis? Examples could include:

• A large customer may have delayed an expected payment.
• Your taxes are more than you budgeted for.
• Sales have slowed unexpectedly, making it difficult to pay bills.
• You have to repair or replace equipment.

Risk control

When faced with market shifts or interest rate changes, high liquidity could help you minimize these risks and provide stability when you need it most.

Businesses with low liquidity may have trouble covering expenses and managing their business day-to-day.

Liquidity helps you quickly pivot without impacting your working capital.

Opportunities

Cash reserves can also help with some of the exciting parts of business ownership.

You might have more flexibility to take advantage of large discounts from suppliers, develop new products, try different business models or even investigate new markets.

Ways to improve liquidity

Ultimately, anything you can do to free up cash will help your liquidity. Having a surplus each month will also do wonders.

Here are six ways to improve liquidity:

|1| Inventory management

Manage your inventory more effectively and make changes where needed.

When you have too much inventory on hand, your cash is tied up in things you need to sell. Are you spending money to store or warehouse that extra inventory?

Consider implementing a Just-In-Time (JIT) inventory method. The goal: Receive goods only as they’re needed without warehousing. This could help free up cash.

|2| Sell assets

Sell any assets you don’t really use. Then, deposit that savings into a business savings or business money market account.

|3| Lease out assets

Own assets that you aren’t using? Consider leasing out equipment or real estate you aren’t using to generate cash without having to sell your assets.

|4| Lease instead of buy

Instead of buying assets, consider leasing them. A large, one-time purchase might use up a significant chunk of cash that could otherwise be saved by leasing.

|5| Pay off debt

Pay off any debts or financial obligations.

|6| Review costs

Finally, review your costs and expenses to ensure you’re only paying for necessary expenditures and aren’t paying more than you need.

Negotiate payment terms with vendors, outsource non-core activities and keep track of your budget to see where else you can tighten up to improve your cash reserves.

Why keep cash in business accounts

While having cash on hand is important for liquidity, keeping that money in a business bank account provides additional levels of safety and security.

Even small amounts of cash on your business premises exposes you to an increased risk of theft, burglary, fire or even misappropriation.

Financial institutions can securely protect your deposited funds. You can see when accounts were accessed, giving you an added level of security. And each account is insured up to $250,000 by the National Credit Union Administration.

Plus, depositing your money could help you earn dividends—allowing your money to grow even more over time.

Different business accounts have different purposes, all designed to help you run your business:

• Business checking account: This account helps you with day-to-day money management—and keeps your business finances separate from your personal accounts.
• Business savings account: Just like personal accounts, a business account allows you to intentionally set aside money for the future—and earn dividends along the way.
• Business money market account: These accounts also provide flexible access to your funds, but usually offer higher returns than a regular savings account.

There are other benefits to storing your money in a business account:

• Financial institutions may want to see an established banking relationship to review your cash flow and deposits when determining how creditworthy your business is.
• You’ll have access to statements that detail all of your transactions, which can help you track your income, expenses and other financial transactions more easily and accurately.
• You can use banking tools and software to forecast your cash flow, enable automatic transfers and bill payments and more effectively manage your working capital.

Dupaco business members have free access to Shine Online and Mobile Banking >

Plus, did you know that your deposits have a ripple effect on businesses like yours? As a not-for-profit financial institution, Dupaco’s earnings are returned directly to our member-owners in the form of lower loan rates, higher dividends on deposits, lower fees and other member perks. That can help other small businesses grow too!