Liquidity pertains to the extent by which an individual or a business is able to meet immediate and short term obligations by virtue of adequate levels of cash, or assets that can be quickly convertible to it. Failure or the inability to do so can pose financial threats and can even lead to a dreaded insolvency. How does one fix such issues then? We asked the experts from AABRS to help us and below are the advice they generously gave.
The Dilemma: Cash is trapped within sales invoices
Fix It: Just because sales are high doesn’t necessarily mean that cash is too. Remember that a good percentage of sales are made on credit, otherwise known as accounts receivables. In other words, the currency is not received not until the invoice matures and the customer pays up. Sometimes, customers are delayed or worse they completely default. Moreover, long outstanding receivables will trap a huge chunk of the resources which can certainly create a liquidity issue.
There are many ways to fix this. Some entities may have to revise their credit terms but if that won’t prove to be feasible, invoice financing, factoring and discounting in particular, shall allow the locked up cash to be freed making them immediately available for use.
The Dilemma: Inventory that has been sitting idle for too long
Fix It: Stocking up on one’s inventory is a practice done to avoid any shortages but the thing is they have to move. When they stay idle for long, they eventually lose value. They pertain to a significant chunk in one’s assets too making things even more troublesome.
To fix this, selling off idle, redundant and useless inventory will bring in more resources and avoid the assets from losing any more value. Another option is to settle an agreement with suppliers so that stocking wouldn’t have to be overdone.
The Dilemma: Redundant and inoperative assets
Fix It: A company may own properties, equipment and other assets that despite their functionality, no longer serve a purpose to the organization. These assets are often stored in a warehouse or similar space. An example would be old office tables that have been replaced with new and more ergonomic ones. They are still in good condition but they no longer serve a purpose. To better liquidity, AABRS suggests that companies move these assets. Selling them will not only bring in cash but will also save storage space, eventually diminishing costs.