There are two types of assets: illiquid, and liquid.
- Illiquid assets have real value, although converting them into cash requires time and effort. Examples include real estate, land, vehicles, machinery, equipment, livestock, and so on.
- Liquid assets are cash, or quickly and easily converted into cash. Examples are checking account funds, stocks, bonds, CDs, cryptocurrency, and so on.
It doesn’t matter what business you are in. You need illiquid and liquid assets in order to succeed at it. The necessity of illiquid assets is obvious: imagine a restaurant without food, or a dairy farm without cattle, and you get the picture. Unfortunately, too many business people overlook the equally vital importance of liquid assets. Because of this, they can wind up incurring substantially higher expenses than they would have had they kept cash on hand – or worse yet, go out of business.
Sherburne State Bank is eager to see all businesses succeed (particularly those we serve throughout Minnesota). We don’t want your venture to fail because you neglected business liquidity, so let’s examine its chief benefits a little closer.
Operational Continuity
Bills. Inventory. Payroll. These are all expected costs of doing business. But when your business is sufficiently liquid, it’s prepared to cover unexpected costs as well. Suppose you had to pay the out-of-pocket deductible for a workers’ compensation claim, or replace one of your fleet vehicles at a moment’s notice. Could you? If not, then the alternative is debt, complete with interest that vacuums away money which could have helped grow your business.
Seizing Opportunities
Business is an adventure: you never know what you’ll encounter next. Just like it will help you overcome adversity, so too will liquidity allow you to capitalize on unexpected opportunities. Suppose the police are about to auction a piece of equipment you need for a dirt cheap price, or a rival business is liquidating its inventory. Without liquidity, you will be less able to leverage such opportunities as they arise.
Long-Term Viability
Nothing in recent history illustrated the importance of liquidity better than the pandemic. During it, the median small business with monthly expenses over $10,000 only had enough cash on hand to last approximately two weeks. That’s a large part of the reason why approximately 37.5% of small businesses went under during the lockdown. We pray something like covid will never happen again.
Better Credibility
Even businesses with healthy liquidity need to take out loans from time to time. When they do, they can expect to start from a better position. Creditors generally offer more favorable terms to businesses that have excellent liquidity. In addition to demonstrating that a business can pay off its loans, high liquidity demonstrates the business is managed with good financial discipline.
How Much Liquidity Should a Business Have?
To reiterate: every business needs liquidity. But like all good things, it’s possible to have too much liquidity. You want to invest as much cash back into your business as possible. You want to spend at least some of it on yourself, too. You deserve it for all your hard work.
It isn’t possible to declare an ideal, one-size-fits-all level of liquidity for all businesses. Factors such as stability, seasonality, customer repayment terms, inventory levels, and likelihood of unexpected costs all determine the best liquidity level for your business. With that said, here is a good rule of thumb to consider: keep three to six months of normal operating expenses liquid at all times.
Do you need a business banking partner you can trust in Minnesota? Then we encourage you to contact Sherburne State Bank or visit one of our locations in Becker, Monticello or Princeton today! Our community bank offers checking and savings accounts that always make your cash immediately available, as well as the right loan to accomplish any big goal.
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