Talking Cents

Liquidity questions from your small business accountant in Melbourne

Here's some tips for every small business owners in Melbourne to ensure liquidity.

Liquidity means the ability to convert assets to cash and it is like the pillars of every house. In this ever-changing economy, small business owners should pay more attention and here are a few tips to consider:

1. Back-up

Cushion your business by having a cash reserve as your buffer. How much to keep for buffer? I would say at least three months worth of cash for your business to operate. Take into consideration of the fixed costs such as electricity, wages and rent, etc., for a month and then multiply by three. That calculated amount is your target to build the safety net for your business.

2. Predict and forecast

The sun doesn’t always shine. You need to prepare for the rain too, don’t end up in the rain without an umbrella. Therefore, you need to have a good cashflow management when the “sun is out”. Be proactive by monitoring your cashflow budget every week and aim to turn over stocks faster. Take not to invest in slow-moving stocks. Most importantly, save up any excess cash into the cash reserve for future use. Tips for every small business owners in Sydney to ensure liquidity (Part 2) Continuing from last week, business liquidity is a crucial part of every successful business. Why businesses have to be liquid enough? It is because the right liquidity level will ensure your business to stay “smooth-sailing”. Here are another two tips that you can apply for your small business

3. Get paid upfront

It is time-consuming and tiring to chasing money from your debtors. Other than that, it also diverts your attention to expand your business too. A common thinking of many owners is that their business is liquid as they have a lot of debtors to get paid. Wrong, debtors are not liquid until they pay you. Some tips to get paid: - You set the rules for your business, shorten the payment terms - Before filling a customer order, ask for a deposit - Only deliver your stock after receiving the final payment

4. Diversify

Anaylse your customer base, what will happen if you lose your biggest customer? Are you too dependent on him/her? If you are, one day when you lose him/her, it might impact greatly of your business liquidity. Be quick to adjust to changing buying patterns and markets. Maintaining the liquidity of your business should be a constant process. And it is always important to plan ahead, especially for the worse. After all, “prevention is better than cure”.