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Business liquidity

Business liquidity is put under pressure during a period of crisis, making effective liquidity management a must for all businesses. The liquidity of a company measures its capacity to raise cash to settle current liabilities, and it’s important to understand the status of your cash liquidity today and in the coming months.

Definition of liquidity

Liquidity indicates whether your business can meet all of its short-term payment obligations. Creditworthiness is an indication of long-term payment obligations. It is important to understand the current state of your liquidity, to understand if you have enough cash to pay all your short-term debts.

By calculating your liquidity, you know if your business can get cash quickly. It allows you to pay your suppliers and salaries or make an investment for your business plans.

Why measure business liquidity?

Effective business liquidity management helps you

  • Generate cash quickly in the face of expected cash deficits, such as unpaid debts
  • And even fuel business expansion

The Covid-19 crisis has induced a sharp drop in liquidity for many firms; in some cases triggering bankruptcy for solvent but illiquid businesses. An ongoing assessment of available cash and business liquidity is therefore essential.

How to calculate your cash ratio?

Calculating cash ratio is not really difficult. You just need to extract two pieces of information from the balance sheet:

• Current assets
• Short-term debts

You take the total amount of current assets as assets on the balance sheet. On the liabilities side, you take debts for a maximum of 1 year.

Liquidity ratio = current assets/short-term debts

A healthy business has more current assets than current liabilities. With current assets, a company must be able to pay its debts which are repayable in the short term.

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Do you want more tips & tricks about liquidity?

Do you want to know more about how to improve your liquidity management? Discover our whitepaper about how to protect your cash flow full of useful advice and practical tips.

Use our business liquidity calculator

You can use our business liquidity calculator to test your incoming and outgoing cash flows and model worst-case scenarios and downsides, including drops in sales or an increase in customer defaults.

Simply complete each field in the liquidity calculator to model liquidity over time and simulate changes in cash liquidity impacted by various trading variables.

Where to start

As a first step we recommend you complete all fields to reflect your current business liquidity, without taking into account the impact of any new negative external factors.

Then select ‘calculate’ to populate the graph showing liquidity over time. Here’s an explanation of some of those fields:

  • Available liquid assets: your inventory, accounts receivable, stocks and unused lines of credit are examples of liquid assets – things you can quickly convert to hard cash.
  • Monthly fixed costs: lease and rental payments, insurance, interest payments
  • Monthly variable costs: labour, commissions, and raw materials
  • One-off losses: the value of spoiled goods, for example

Business liquidity modelling

Once you’ve understood your current business liquidity, why not begin to model worst case and best case scenarios to understand future liquidity scenarios?

For example, what would the impact on business liquidity be if:

  • Defaults increased / increased?
  • Sales increased / increased?
  • Payment delays increased / increased?
  • Monthly costs increased / increased?
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This Allianz Trade liquidity simulator tool is our proprietary and is protected by copyright. The Allianz Trade and Allianz logos are trademarks or registered trademarks belonging to the Allianz Group. Allianz Trade is the trademark used to designate a range of services provided by Euler Hermes. The use of our liquidity simulator tool is granted to you for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. Our Allianz Trade liquidity simulator tool should not be reproduced and its outputs should not be disclosed without our consent. Given that this tool uses assumptions which are simplified versions of business reality, it is only intended as an illustrated example showing the potential impact of a range of predefined factors. We make no representation nor warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Our tool’s features are subject to change without notice.The use of our liquidity simulator tool is granted to you for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. Our Allianz Trade liquidity simulator tool should not be reproduced and its outputs should not be disclosed without our consent. Given that this tool uses assumptions which are simplified versions of business reality, it is only intended as an illustrated example showing the potential impact of a range of predefined factors. We make no representation nor warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Our tool’s features are subject to change without notice.

How to protect your liquidity?

Unpaid invoices have a negative effect on your cash flow and liquidity. Do you regularly have an unpaid bill? Do you regularly work with new clients? Our trade credit insurance solutions help you protect your liquidity. We monitor the creditworthiness of your customers and take care of the collection of your unpaid invoices. And when your customers don't pay or go bankrupt, we compensate you. Your liquidity is good protected.

Why choose Allianz Trade?

62.000+
CLIENTS WORLDWIDE
83 million+
COMPANIES IN OUR DATABASE
AA rating
BY STANDARD & POOR'S

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