Finance professionals are categorical that sound business liquidity management is key to ensuring that your company enjoys security, freedom and agility. Tracking liquidity means keeping a constant eye on the shifting financial flows connected with your activities.
The liquidity ratio is one of the most important indicators because it allows you at any time to assess your company’s short-term solvency. It calculates short-term obligations and cash flows, and determines your ability to pay current debt obligations without raising external capital.
The liquidity ratio is shaped by several indicators, including assets, inventory, debts, and trade accounts receivable. While changes in assets, inventory and debts can be predicted, this is less true for accounts receivable, i.e. the total amount of outstanding payments owed by customers. A cyclical reversal or a payment default by your main customer could set off a chain reaction of negative effects.
If one of your partners goes out of business, you might be unable to pay your suppliers, who might be forced in turn to delay payments to their own suppliers. Trade credit insurance can help you safeguard your cash flow and avoid bad debt. It covers your receivables due within 12 months against unexpected commercial and political risks (customer bankruptcy, changes to import and export regulations, etc.) and compensate you in case of bad debts.
Tip: Numbers are the starting point for dialogue with customers. If you see something strange in your receivables, reach out to the customer in question as soon as you can. You can work together to agree on a short- or long-term payment plan. Getting in touch with the customer if you detect early signs of weakness may help you to avoid considerable difficulties. Better yet, having these conversations may help to build long-term relationships of trust with your customers, even in case of late payments.
For more tips and advice on business monitoring, download our ebook: Boost your financial performance analysis.