For SMEs to avoid liquidity risk, they would need to ensure that their business is able to maintain a positive balance sheet. As such, it is imperative for them to manage their inventory and expenses that they are able to maintain healthy cash flow. Whether this is through obtaining a debt consolidation loan or seeking different ways of business improvement, liquidity risk is important for SMEs in general.
If you are a small business owner in a liquidity jam, here are a few strategies you can apply to your businesses.
1. Cash Flow Projections
An excellent way to avoid liquidity problems in any business is to monitor your cash flow tightly. Small business owners should seek to take customers’ history, upcoming expenses and vendor invoices into account when monitoring sales revenue and clearance of bills. Looking closely at these three factors can help business owners make informed decisions, therefore avoiding liquidity jams.
Another liquidity risk faced by small business owners in Singapore is leakage. This is a situation where capital investments are not able to produce returns as projected. A perfect example is when a piece of equipment is bought but fails to reduce the cost of production as anticipated. Such a decision should be well thought out before implementation. You should seek to plan well and avoid making an investment that will drive your business into liquidity jams.
3. Assets and Liabilities
Business owners or accountants must ensure that they keep an up to date balance sheet. Not only that, but the sheet should also contain accurate data of their current assets and liabilities. Current assets include cash, accounts receivables, stocks, and inventory. Current liabilities include vendor payments, operating costs, contracts, and payrolls. Keeping records for all assets and liabilities can help business owners monitor the capital and cash flow carefully, avoiding liquidity problems in the business.
4. Cash Flow Improvements
Another way a small business owner can avoid liquidity problems is by improving the process of collecting accounts or receivables in the business. For instance, you could ask for remittance from relatively slow-paying clients. You can also do credit checks before offering goods or credits. Coming up with a quick way of formulating and collecting invoices is also another improvement. Small enterprises can avoid liquidity problems by clearing their debts before their due date or establishing flexible payment agreements with their suppliers.
5. Risk Management
A good business manager can access his or her risk to avoid driving the business into liquidity risk. In case of a potential risk, they should prepare their businesses well. If you are a business owner, some of the potential risks include employee injury, property losses, pandemics, or legal liability. One benefit of ensuring good records is that you can quickly acquire a quick loan to salvage your business from any liquidity problems. Some of the contingency plans you can take to avoid such situations include obtaining a good insurance coverage, equip safety measures for employees, and setting good operation policies.
Even though shielding your business from liquidity problems can be impossible, the strategies mentioned above are useful in mitigating cash flow problems in your business. Cash is like oxygen for any small business, obtaining loans such as an instant loan is great in helping your business steer clear of liquidity jams. You should seek to avoid any practice that can jeopardise your business or put it at risk of running out of cash.