How Can you Improve your Business’s Liquidity?

Written By :

Eugène Gilbert
Vice President of Practice CPA Management consulting

A business can need more substantial working capital to support its operations, especially in a growth phase.

There are several ways that you can increase a business’s liquidity, when needed. Nevertheless, the company’s context, both internally and externally, must undergo a thorough analysis so you can choose the right option.

1- Collecting receivables or selling an asset

A customer pays for a good or a service provided or else the business sells a piece of equipment to increase the amount of cash in its bank account.

2- Revising the credit policy the business offers its customers

For instance, a business could revise its credit policy by requiring that customers pay within 30 days rather than 45 days and, thus, collect trade accounts receivable more quickly.

Be careful! When revising the credit policy, you must consider how it could affect sales. For example, a policy that is too strict could direct your customers towards your competitors, who might offer a similar product with more flexible payment deadlines. On the other hand, a policy that is too forgiving could result in an increase both of interest due on your line of credit and of the risk of doubtful accounts.

3- Revising the inventory management process

A company could decide to decrease the size of its warehouse inventory and place orders only according to the production or sales needs. It could then access the cash on hand, which would have been otherwise used to purchase inventory to support other strategic activities.

Be careful! When revising your inventory management process, you must consider the business’s strategic orientations.

The company must ensure it can meet its customers’ needs efficiently and in a timely manneror risk losing sales and tarnishing its reputation.

Some other factors are part of the decision process, such as:

the possibility of achieving economies of scale;
the possibility of receiving rebates from your suppliers;
the risk of inventory obsolescence at the time of sale;
the storage costs.

4- Delaying payments or negotiating agreements

In some cases, you can delay a payment or negotiate payment terms and conditions with your suppliers.

For instance, rather than paying a supplier immediately, a business could decide to take advantage of the 30-day payment period it offers, which leaves liquidity in the bank in the meantime.

Be careful! When taking advantage of the supplier’s payment period, you must consider how it might affect your relationship with that supplier. For instance, choosing a payment period that is too long could impact your relationship with suppliers, tarnish the company’s reputation or end a business relationship with a supplier. On the other hand, choosing a payment period that is too short could mean giving up on free financing or discounts by not paying immediately.

5- Taking out a loan

A business could apply for a line of credit or a loan from its financial institution, with the amount directly deposited in the bank account.

Be careful! Long-term liabilities should be used to finance long-term assets, such as property and equipment, whereas current liabilities should be used to finance current assets, such as working capital.

6- Injecting additional capital in your business

It is possible, for example, for the current shareholders to inject a certain amount of capital in the business or to acquire a new shareholder by issuing new shares.

7- Providing your sales tax reports at strategic points in time

You can provide your sales tax reports at strategic dates, which are the following:

as soon as possible if the business is eligible for a refund, accelerating collection;
conversely, as close to the deadline as possible if the amount of taxes due is higher than that of taxes receivable.

8- Considering alternative sources of financing

For instance, the business can consider factoring trade accounts receivable, i.e., selling some of its receivables to a third party, such as a financial institution. The business can thus receive an immediate amount of cash, while the third party will collect amounts owed in a relatively short timeframe.

Best practices to optimize a business’s liquidity include the following:

making financial projections and creating a cash budget with the help of your accountant;
analyzing production costs to optimize the business’s profits;
implementing a dashboard to monitor the business’s profitability indicators;
monitoring the business’s financial indicators on a monthly basis;
revising or implementing a credit policy centred on the business’s strategic objectives and ensuring that customers respect agreed-upon payment periods by structuring the accounts receivable collection process;
managing payments to suppliers according to, among others, the payment periods they offer, discounts as well as needs in working capital;
revising or implementing an inventory management process aligned with the business’s strategic orientations.

Before you decide to increase your business’s liquidity, you should do a comprehensive analysis of its operations to make it as efficient as possible.

Please don’t hesitate to call on our team of experts who can offer you support through this crucial process.

This article has been written with Maxime Lessard-Pelletier and Isabelle Tremblay

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