Liquidity is defined as, a state of being able to meet financial obligations. Business owners should make sure that the business is able to pay outstanding debt. The ability of a business to continue honouring debt, is a good measure of the strength of the management.
So how can we consistently maintain a good liquidity? In our last few articles, we discussed managing debtors and creditors, and saving. These principles are useful and we encourage you to read them. In addition to these articles:
1. Costing products and services correctly. Include all fixed and variable costs;
2. Budget to understand all the costs and plan ahead;
3. Expect some delays in payment and plan accordingly;
4. Plan to make a profit and work hard at achieving it.
A common measure of liquidity is the liquidity ratio. This ratio measures the ability of a business' current assets to pay for the current liabilities. A good ratio is between 1.5 and 2.
Keeping an eye on liquidity and maintaining a sound ratio will build confidence in your business and integrity.
