Business Liquidity

Net current assets in the balance sheet broadly define liquidity: Negative net current assets signifies an illiquid balance sheet.

How to Calculate Liquidity

Cash in the bank contributes to liquidity but does not entirely define it. A business can be showing a million in cash in its balance sheet but if it has a million in liabilities which are payable within the coming twelve months it has zero liquidity.

The broad description of liquidity is described by net current assets (current assets less current liabilities) also known as working capital. If your Figurewizard balance sheet forecast shows a deficit for net current assets, working capital and therefore liquidity will also be in deficit.

That will mean that your forecasts woll be expecting the business to run out of cash at some point during the financial year ahead, rendering all of your forecasts, including those for profits and cash flows null and void.

Short Term Liquidity Solutions

In the short term the injection of capital or long term loans (the longer the better) will add liquidity to a balance sheet with a working capital deficit. 

These will not however address the underlying problem which will be inadequate cash flow arising from core trading activity, also known as operations. That will call for cutting back on expenditure with overheads, investment in new fixed assets and year-end stock being prime candidates for action.

When producing forecasts with Figurewizard changing your original forecasts for those using the What-If calculator lets you see the results on cash flow in real time. The key numbers to look out for are Operating Cash flow and min. Month + Undrawn Financing.

Ideally not not always necessarily operating cash should be in the black but min. month + undrawn financing must definitely be so.

Long Term Liquidity Solutions

Increasing sales, margins and profits are a much longer term approach to building sustainable balance sheet liquidity, which is why cash injections from new capital or long term loans must be the first priority.

However ensuring that improved trading and profits are likely to serve their purpose calls for planning and planning calls for forecasting to enable setting budgets to make sure that the business is going to have have sufficient liquidity to avoid running out of cash.

FAQs
The Truth about Monarch Airlines Labour's Spending over 10 years from 2000 Business Planning and Forecasting: What to Look For. Credit Checking - How to Read Micro or Short Form Accounts Amortisation of Arrangement Fees for Long Term Loans BHS Profits Performance 2010 - 2014 BHS profits, liquidity and cash flows 2009 - 2014 How to Calculate a Free Cash Flow Forecast Campari: How to apply for a bank business loan What are Current Liabilities What are Current Assets Late Payers and Cash Flow What is Operating Cash Flow What is Working Capital How to Read a Balance Sheet Business Planning Cash Flow Calculator Short Term Liquidity Business Liquidity Corporation Tax is not Calculated on Net Profit Small Business Corporation Tax Cash Flow Calculator Using Figurewizard - VAT Using Figurewizard - Sales by Month Using Figurewizard - HP or Instalment Plan Budgets Using Figurewizard - How the budgeted cash flow forecast is calculated Using Figurewizard - Fixed Asset Budgets Using Figurewizard - Calculate Purchase of Goods Using Figurewizard - Forecasting Payments to Suppliers Using Figurewizard - How to Forecast Cash Collection Solvency and the Balance Sheet Property in the Balance Sheet Why Equity is a Liability Asset Management and Liquidity Selling Fixed Assets Contracts: Invitation to Treat What is Deferred Income Loss on the Sale of Fixed Assets Calculating Gross Profit Margin Profit and Loss Statement What is Operating Profit What is Net Operating Revenue What is Equity Profit on the Sale of Fixed Assets How Taxable Profit is Calculated What are Operating Overheads Overheads - Provisions Depreciation What is Business Operating Activity What are Fixed Assets