Managing cash is a major challenge for French companies of all sizes and legal structures. What is business liquidity, and how do you calculate it? How can businesses efficiently manage it? In this article, we cover the main principles of business liquidity, including how to improve it and ensure business sustainability in France.

What’s in this article?

• What is business liquidity?
  
• What is the role of business liquidity?
  
• How do you calculate business liquidity?
  
• How do you manage business liquidity?
  
• How can you improve business liquidity?
  
• What are the best tools for managing business liquidity?
  
• What should you do with surplus cash?
  

What is business liquidity?

A company’s liquidity refers to all cash that is immediately available in a company’s cash register or bank accounts at a given time. It enables the company to finance its operations.

What is the role of business liquidity?

Available cash assets are a key indicator of a company’s financial health. They reflect the business’s capacity to cover daily expenses, such as wages, social security contributions, supplier invoices, rent, subscriptions, insurance, and taxes. They help a business face unexpected circumstances and invest in profitable projects. The main role of available cash is to ensure that a company can efficiently honor its short-term and long-term financial obligations.

Effective cash management helps a company avoid defaulting on payments and other major financial problems. The business can expand and attract investors.

How do you calculate business liquidity?

Liquidity increases with cash collections and decreases with cash expenses. To calculate a business’s net liquidity, deduct short-term debt from the cash available in the company’s register or bank accounts:

Net Liquidity = Available Assets – Debt

Another way to calculate a company’s net liquidity is to deduct the working capital requirement (WCR) from working capital (WC). This calculation method is more accurate, and most businesses use it. The WC amount equals the company’s medium-term and long-term resources, equity, and bank loans after deducting the funds required to operate. The WCR is calculated by deducting supplier debts from inventory and customer receivables.

The formula for calculating net liquidity using WC and WCR is as follows:

Net Liquidity = WC – WCR

If net liquidity is positive (i.e., greater than zero), the company has a cash surplus. It can honor its obligations without accessing external financing, and the company has a healthy cash position.

Conversely, if net liquidity is less than zero, the company lacks the financial resources to operate. In this case, companies often use external financing to meet obligations and avoid bankruptcy. This is not financially healthy.

Lastly, a net liquidity equal to zero indicates that the company is able to meet its needs—barely. It has no margin to maneuver if unexpected circumstances arise, such as cost increases or late customer payments. This exposes the company to the risk that its liquidity will move into the negative. If net liquidity is zero, a company should focus on improving its cash position.

How do you manage business liquidity?

To effectively manage business liquidity, do the following:

• Create a projected cash flow plan.
  
• Use computerized tools (e.g., bookkeeping software to automate financial processes) and dashboards to provide insight into changes in cash flow.
  
• Monitor incoming and outgoing cash on a daily basis, and compare it to the projected cash flow plan (e.g., identify gaps and updates needed).
  
• Efficiently manage receivables and payments.
  
• Be aware of market trends and the industry’s seasonal fluctuations.
  
• Ensure that net liquidity stays positive.
  
• Maintain sufficient flexibility to cope with unforeseen expenses and potential economic changes.
  
• Strategically invest excess funds.
  

How can you improve business liquidity?

There are several ways to improve a company’s cash position:

• Follow up with customers about unpaid invoices.
  
• Negotiate longer payment terms with suppliers.
  
• Refine expenses and inventory by maintaining them at strict minimums.
  
• Research internal and external financing sources.
  

To access external financing and improve a company’s cash position, it’s best to seek a bank loan before experiencing a cash shortfall. Business owners can also approach friends, family, or angel investors or use intercompany loans, crowdfunding, government subsidies, or assistance from shareholders. Shareholders can provide loans or capital to temporarily bolster a company’s cash position.

Stripe Capital offers revenue-based financing solutions. With Capital, you can get approved for a loan or merchant cash advance in minutes—without the lengthy application process and collateral requirements of traditional bank loans. Stripe provides faster access to financing for expanding with confidence.

What are the best tools for managing business liquidity?

There are many cash management tools available. Excel and Google Sheets provide the ability to manage basic expense and collection transactions. There are also specialized treasury management systems (TMS) with advanced, specific features.

In addition, an enterprise resource planning (ERP) system can centralize administrative and operational processes (e.g., inventory management, suppliers, payments, expenses, documents, accounting) on a single platform. ERP software provides a comprehensive overview of a company’s activities and often includes powerful cash management features.

A company’s size, financing, and operational needs dictate the tool needed. When selecting the right tool, it’s important to consider price, features, and interoperability with existing tools.

What should you do with surplus cash?

Surplus cash indicates that a company is in good financial health and has excess cash in relation to its needs. The company can use its excess cash to finance business growth (i.e., purchasing professional furniture, modernizing equipment, or investing in research and development). It can also finance profitable projects that could lead to further growth. In general, it is better to invest surplus funds rather than leaving them unused.