Avoid liquidity problems in your SME

• Avoid liquidity problems with these six tips
• The liquidity of an organization is the ability of an asset to be converted into money without losing its value.

Shortfalls in a company's treasury are a more recurring type of setback than those in charge would like to have to assume. In recent years, it has been seen more than ever that nothing is predictable, it is difficult to be prepared for a pandemic, but every entity must take unforeseen events into account. However, there are some actions that can help avoid bankruptcy and maintain the flow of capital as much as possible.

First of all, it is important to clarify that the liquidity of an organization is the ability of an asset to be converted into money without losing its value. In other words, liquidity in an SME refers to its ability to pay and meet its obligations in the short term.

To achieve a constant volume of cash flow that allows you to maintain activity and avoid liquidity problems, it is very important to take these six tips into account:

1. Create and maintain an emergency fund

• Allocating a portion of the profits generated to an emergency fund will make it easier to face situations that may cause a solvency or liquidity problem.
• To guarantee its effectiveness, it will have to be recurrently nourished and can be used when the treasury presents shortages in its circulating capital.

2. Optimize inventory

• Continuing with good practices and to the extent possible, every company, especially industrial, must avoid inventory saturation.
• It is essential to know the number of buyers interested in your products, to know what the need for raw materials or products to be manufactured is, since having excess stock in an entity can entail high costs in the medium or long term.

3. Reduction average collection period

• Getting customers to pay their invoices in the shortest time possible is a very effective way to increase a company's liquidity.
• Establishing specific collection periods will help invoices be paid more quickly.
• It is also important to carry out a prior study on clients and their solvency, to reduce as much as possible the chances of default or falling into the red.

4. Extension of average payment period

• Another fruitful relationship for the liquidity of a corporation is contact with trusted suppliers since they can facilitate commercial credit and, if necessary, offer the possibility of having extensions in the terms of payment periods.

5. Reduce costs

• Very high production costs reduce current assets, impacting liquidity.
• It is important to analyze and eliminate redundant processes that do not add value to production, but rather consume various resources such as money, personnel and time. By doing away with these, significant improvements will be seen in the areas of the company that operate more efficiently.
• It is important to keep in mind that this practice does not have to be at odds with quality service in the market.
• The reduction of costs implies, therefore, a more exhaustive analysis of what the company can save without harming its position or recognition.

6. Resort to external financing

• Having a line of credit backed by a trusted bank is an effective strategy to guarantee constant liquidity.
• It must be taken into account that the interest associated with this line of credit will only be applied to the capital used.

In summary, efficient liquidity management is a primary objective for every company, especially in an unpredictable and changing environment like the one we find ourselves in. With these six key strategies, companies will be able to preserve solvency and maintain a constant flow of capital, fundamental to ensuring good financial health of the company.