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.

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