It takes money to make money. Every business leader understands that liquid assets are doing little to grow and strengthen their organization and that reinvesting any available cash in critical business operations can be critical for creating the company of their dreams.
Yet, not having enough cash on hand is also a poor business strategy. Business leaders need to have cash available to make key financial moves, like debt payments, that will keep their organization afloat. Liquidity requires careful management — but not every business leader understands this as well as they should.
Unfortunately, there are many risks to liquidity that inexperienced or ignorant business leaders tend to ignore. Knowing more about the most common liquidity risks should help leaders make better business decisions that contribute to greater stability and success into the future.
Inability to Secure Financing
Poor liquidity management can cause businesses to fall into a dangerous and ultimately deadly cycle of missing debt payments and lacking access to additional funding. When a business does not have the liquidity to follow loan agreement covenants, they might pursue additional financing — but lenders are unlikely to extend more money to businesses with a history of late or missing payments for fear of falling victim to the same lack of repayment. To maintain positive relationships with lenders and benefit from access to financing options, business leaders need to prioritize effective liquidity management.
Unplanned Capital Expenditures
Some businesses and industries are capital-intensive, meaning that they require large amounts of investment and tend to have a high percentage of fixed assets. These companies need to be even more attentive to the management of their liquidity, as an unexpected capital expense can easily become a severe concern that causes intense constraints on existing budgetary needs. Business leaders should recognize that liquidity risks for capital-intensive businesses will always be higher, so they will need to create stronger financial strategies to account for surprise expenses.
Poor Cash Flow Management
Cash flow management and liquidity management are often confused and for good reason. Good cash flow management involves understanding and effectively optimizing the amount of money flowing in and out of a business. Every organization hopes to maintain a positive cash flow, which means they are earning more than they are spending. Unfortunately, some business leaders are incapable of managing cash flow properly, which leads directly to missed liquidity opportunities and severely heightened liquidity risk. Poor cash flow management is likely to result in other liquidity risks on this list and eventually prevent business viability in the long term.
Companies must see profits continue to rise if they want to maintain hopes of continued growth. Though many businesses will encounter slowed growth and perhaps even the occasional plateau, profits should always continue to go up. If an organization sees its profits begin to fall, it is in the midst of a profit crisis and must utilize assets to maintain the costs of capital or else start selling critical aspects of the business to endure. As the name suggests, profit crises are serious events that require immediate and drastic responses. Proper liquidity management should help business leaders avoid profit crises or else navigate them more effectively to ensure company survival.
Lack of Visibility
Clear visibility is key for business leaders looking to maintain control over the success of their organizations. When a business leader cannot see some component of their business process, they will not know about a looming problem, and thus, they cannot develop a strategy to overcome that problem before it tests business integrity. Visibility issues will ultimately heighten liquidity risks by forcing business leaders to make last-minute decisions and surprise expenditures that tend to interfere with existing plans and budgets. Stronger liquidity management will always involve increasing visibility and perhaps transparency to improve communication and problem-solving and reduce financial challenges.
Liquidity management is not a new concept, but it is one that many business leaders have little real-world experience with before entering high-level executive positions. By recognizing the importance of liquidity management and investing in proper tools and services, leaders can invest intelligently in their organizations to see more secure growth and success.