Although it may seem like a catchy phrase, it hides a truth that frequently occurs in many companies, whenever the flow of income and expenses does not coincide with the flow of collections and payments .
This circumstance occurs frequently, and the origin of the lack of cash flow must be analyzed with the appropriate tools when making decisions for the company's management.
Among these tools we find the STATEMENT OF CASH FLOWS ( SEF )
The difference is in the details.
Liquidity is the company's ability to meet short-term payment commitments over the next twelve months. Liquidity needs have a short horizon and test the ability to pay. These ghana email list include loans, suppliers, creditors, taxes, insurance, employees and dividends.
Liquidity depends on results, yes, but profits do not tell the whole story of how the company is doing and, in particular, the health of its treasury .
Liquidity is supported by four pillars:
It is common for many companies to focus on increasing their turnover before any other factor, forgetting the resources needed to increase it and relegating liquidity to the background.
This approach usually puts a strain on the company's treasury and can lead to a liquidity crisis which, when combined with other factors , can lead to the company's insolvency despite generating profits.
It is the ultimate death from success.
To avoid this, we must have identified the operational financing needs (OFN) of our company and the factors that intervene in them.
What are the reasons for lack of liquidity?
Lack of liquidity can be caused by a combination of a wide variety of factors:
Fortunately, all these destabilizing factors can be prevented through Cash Flow Statements and Operating Financing Needs , and the creation of monitoring systems that anticipate needs and payments to facilitate agile decision-making and a reversal of those bad policies that affect the inflows and outflows of money and the correct management of cash in circulation.
In some cases, this means speeding up the invoice collection process. In others, it means not using the VAT collected as a source of financing or not seeking discounts for large stock purchases that will significantly impact liquidity if sales do not materialize quickly.
The map has several paths and companies often have to travel them simultaneously .
This increases liquidity and allows efforts to be focused on improving business profitability, focusing not so much on sales but on the product margin.
In practice, a crisis scenario in a company tends to give priority to liquidity, since most of these obligations share a non-renewable nature. On the contrary, in the long term the objective is profitability, profits, because they are responsible for the creation of value linked to the business model, and without this value the company could be doomed to disappear.
If you are interested in learning more about these points, you can access our free webinar . In it, we reveal the key points to keep in mind to maintain the balance that any company needs between profit and liquidity .