Liquidity is a term you often hear in the world of finance and business. But what exactly does it mean? And why is it so crucial to keep a close eye on your liquidity?
In this blog, we explain what liquidity is, how to measure it, and give an example of how smart tools like TriFact365 can help improve your liquidity position.
What is liquidity?
Liquidity is a company’s ability to meet its payment obligations in the short term. Or put more simply, do you have enough cash (or readily available cash) to pay your bills on time?
A company with good liquidity can pay suppliers, wages and taxes effortlessly. If liquidity is poor, payment problems may arise – even if the business is profitable on paper.
How do you measure liquidity?
There are several ways to measure liquidity. Two commonly used key figures are:
- Current ratio
This is the ratio of current assets (such as cash, bank balances, debtors and inventories) to current liabilities.
Formula:Current ratio = Current assets / Current liabilities - Quick ratio (or acid test ratio)
This excludes inventories, as they are often less likely to be converted into cash.
Formula:Quick ratio = (Current assets - Inventories) / Current liabilities
A current ratio of 1.5 or higher is often considered healthy, but it depends on your sector and business model.
Why is liquidity important?
Even profitable businesses can run into trouble if there is insufficient liquidity. Think of customers paying late while you have to pay your suppliers and staff. Without sufficient ‘cash’, you simply cannot keep running.
Good liquidity:
- Prevents stress around payment deadlines
- Strengthens your negotiating position
- Makes growth or investment easier
- Increases your reliability towards suppliers and financiers
Smart invoicing with TriFact365
A good liquidity position starts with getting a grip on your cash flows. That’s where TriFact365 comes in.
TriFact365 is an online platform for automatic processing of purchase invoices, sales invoices and receipts. By processing invoices faster and linking them properly to your accounting system, you get a quicker overview of your outstanding items and cash flow. Moreover, processing times are reduced, allowing you to pay (or collect) earlier and improve your liquidity.
With features such as automatic invoice recognition, real-time processing and direct links to accounting software, TriFact365 helps make financial records more efficient and clear.
Conclusion
Liquidity is essential to the day-to-day health of your business. It is more than just numbers: it indicates whether you are financially flexible enough to keep your business running smoothly. With tools like TriFact365, you can support this process and strengthen your financial position.
Do you already have insight into your liquidity? And are you already using smart solutions to optimise your cash flow?
