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THE ADVANTAGES OF FINANCIAL LIQUIDITY / 1

The less things you have to finance, especially as a business owner, the better! When you purchase something in full, large purchases in particular, you usually receive some sort of discount. Every little bit helps!

To start with, current assets are things that you can convert into cash easily. If you are looking at your balance sheet, look under “current assets.” Current assets are things that have a lifetime of less than a year. Some examples are: checking accounts, petty cash, short-term investments, accounts receivable, and inventory. Liquidating a current asset should not be very difficult. For example, collecting on an accounts receivable should be as easy as calling the customer up and collecting payment immediately. It is not always “easy” to collect the money but in most cases, it is. Petty cash is perhaps one of the easiest as it is cash that is readily available.

The ability for a company to pay short-term liabilities provide a clear picture to how well the company is doing. If a company has a high liquidity ratio, they are more likely to be in a good spot, financially.

Inventory can take the longest to liquidate. Inventory can also bring forth the most amount of risks. With inventory, customers have to purchase the product at a specific price in order for the company to make money. Returned or damaged items are something else that needs to be kept in mind when trying to calculate it as profit. If a customer purchases products via credit card, the company has to wait for the credit card company to release the funds. There is also a possibility there is not enough funds available on the credit card for the transaction.

Having financial liquidity gives a company the opportunity to take advantage of situations that they may be faced with. As a business, this may give a company an upper hand in comparison to another business in the same filed who does not have as much financial liquidity.

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