Good liquidity means that you have significant buying power. Liquidity also gives an indication of the company's capacity to service debt when it falls due for payment.
A common problem in the start-up phase is that the expenses come before the income. Way before. And the fact that you are expecting money does not mean that creditors will sit by patiently waiting to be paid.
Unfortunately, it is also fully possible to go bankrupt even if your business operations are profitable. Tight liquidity can lead to payment problems.
The best way to manage your liquidity is to set up a good budget. A separate liquidity budget, divided into months or weeks, shows whether there are sufficient funds in the company's account at all times and which months are likely to be a tight squeeze for the company.
Keep a record of when funds are to be paid out and when you expect to receive money. The goal is to enable you to determine how much money you need to have at your disposal to get through each month.
Relevant link:
» Liquidity budget template (xls)A good budget is an important management tool. By continuously checking your results against the budget, you will see how close you are to attaining your financial goals. This, in turn, can provide a basis for implementing measures if your revenues are behind budget or your costs are over budget.
- Have you prepared a basis for calculating income?
- Have you formed an opinion about when you can realistically expect to start receiving income?
- Have you gathered all the information you need to calculate expenses?
- Have you determined which investments you need to make?
Relevant links:» Operating budget template (xls)