Metode de îmbunătățire a lichidității IMM-urilor

Methods for Improving the Liquidity of SMEs

Running a business is never easy, but entrepreneurial challenges are even greater in the specific context of the Romanian market. If you are an entrepreneur or manager in a local SME, then you have surely experienced firsthand how managing your business is often complicated by an unstable legislative framework, which makes adequate planning efforts difficult. 

For example, recent fiscal regime changes, implemented quickly and without appropriate consultation with the business community, will generate numerous unexpected obstacles, putting additional pressure on budgets and cash-flow of companies during a period already characterized by macroeconomic instability.

The main challenges of any entrepreneur

However, regardless of the economic context, the first step to achieving the goal of consolidating a sustainable business in the long term is to understand the two main benchmarks that condition the health of any business: profitability and liquidity.

While profitability is better understood and managed by most entrepreneurs as a continuous effort to maximize revenue and optimize business expenses and is also the source of distributing economic profits obtained in the form of dividends, liquidity remains a less conscious and ineffectively addressed challenge in many SMEs.

What does liquidity refer to? 

We all understand the need for a business to make frequent and recurring payments to suppliers, employees, the government, or creditors. That’s why we know that without adequate financial resources, even a business with good commercial potential can stagnate or even fail. 

Liquidity indicators are what will help you find out if your company has the necessary funds if you monitor them carefully. Essentially, liquidity measures how quickly a business’s assets can be converted into money, that is, the resources it relies on to generate profit. In other words, it shows us the ability of that business to meet its short-term financial obligations to third parties.

How can you measure liquidity?

The most well-known liquidity indicator, probably used by all entrepreneurs, is net cash flow. It captures the difference between incoming cash from sales of goods and services or financing (inflow of cash) and payments to suppliers, employees, government, creditors, shareholders, or partners (outflows of cash). 

From the perspective of this indicator, liquidity will be adequate if the business can generate a positive net cash flow from its core activities. 

In addition, there are specific indicators, such as the current liquidity ratio or immediate liquidity ratio, which you can use along with working capital indicators (e.g. average accounts receivable collection period, average payment period to suppliers, inventory turnover).

General methods for improving the liquidity of SMEs 

There are many tools for you to ensure that your business always enjoys good liquidity, but among these, we mention a few that you should not miss:

  • Maintain an updated cash-flow forecast! 

In addition to the budgets that you prepare and regularly monitor, it is always useful to prepare cash-flow forecasts in parallel to see to what extent there will be periods where funding will be needed to finance a liquidity deficit. 

While the former tracks the planning of revenue and expenses and the profit (as the difference between the two) over a certain period, cash-flow forecasts will consider the estimated receipts and payments to be made in the same interval. 

  • Understand the patterns of your own business, supplier, and customer liquidity!

This will help you negotiate an optimal payment terms ratio with your customers and the terms accepted by your suppliers, to the extent that this is possible. Thus, you will encounter as few liquidity deficit situations as possible. 

This occurs especially when you have to make payments to third parties faster than you can collect the value of the invoices issued to your customers. 

  • Use the internal resources of the business to generate liquidity! 

The main categories of assets that you can rely on to generate liquidity starting from the internal resources are stocks and receivables. 

Thus, good inventory management, such as liquidating old inventory, monitoring stock indicators, and adapting them to the business cycle, will contribute to the positive net cash flow of your business. 

Similarly, efficient management of receivables, achieved through the use of modern tools, such as alternative financing through factoring, will help you easily convert invoices with payment terms issued to customers into cash, so you can meet the financial obligations of the company on time. 

How to improve liquidity using Alternative Financing?

Whether or not you have used factoring in the past for the SME you manage, accessing this instrument through alternative financing will seem extremely easy, quick, and bureaucratic-free.

After opening an online account, you must upload the invoices you want to finance. This way, you will have access to a marketplace where multiple banks, financial institutions, and private investors can bid for these invoices, allowing you to choose the offer that best fits your needs.

Be agile in running your business! 

Any effort to improve liquidity should currently meet the agility criterion.

Using factoring as an alternative financing method involves a faster, more flexible, transparent, and cost-effective liquidity perspective.

 

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