The world of business is constantly evolving, presenting new opportunities to adaptable, flexible business owners and companies. An important part of staying agile lies in building a healthy reserve of liquid assets.
In this article, we will explore a variety of advantages of having liquid assets and show how they can help businesses stay nimble and competitive in an ever-changing market.
What are “Liquid Assets”?
Assets that can be quickly changed into cash with minimal impact on the asset’s value are liquid. With liquidity, entrepreneurs and companies have the remarkable ability to turn cash flow on and off at will, like a faucet. To meet short-term commitments, it’s important to maintain a reserve of liquid assets. Cash and cash equivalents, checking and savings accounts, accounts receivable, money market accounts, short-term bonds, and marketable securities are a few examples of liquid assets.
Having liquid reserves on hand has some exciting advantages! The benefits of liquid assets include quick access to funds, flexibility in decision-making, increased negotiating power, less reliance on debt, and improved cash flow management. Harnessing these benefits can elevate your business to new heights of success.
Quick Access to Funds
We’ve established that liquid assets are necessary to cover short-term commitments and unanticipated expenses (such as equipment breakdowns). However, liquidity also enables business owners and companies to take quick action when new investment and business opportunities arise. In essence, liquid assets ensure businesses remain agile and ready to navigate the uncertainties and possibilities of the market.
In contrast to illiquid assets, liquid reserves may be sold quickly and at full value. Additionally, several types of these assets, such as high-yield deposit accounts, can protect your capital during a financial crisis since the federal government insures them up to a certain level (typically $250,000 per account owner per account type). Note that the deposits are only protected if placed in an FDIC insured institution. On the other end of the investment spectrum, illiquid assets, like real estate, are challenging to sell quickly and might only bring in a small fraction of their value.
Flexibility in Decision-Making
Creating a diverse portfolio that combines both long-term illiquid and short-term liquid assets offers businesses and entrepreneurs a strong foundation for stability and flexibility. Easily accessible liquid reserves provide the freedom to make strategic decisions that shape your future success. From launching a new product to expanding operations or even acquiring a competitor, liquid assets allow business owners and companies to make quick decisions and capitalize on opportunities that could otherwise be missed.
Increased Negotiating Power
A robust cash reserve can significantly enhance your business’s negotiating power in a variety of situations. For example, companies with readily available funds can often secure better terms, discounts, or priority access to limited resources when dealing with suppliers or vendors. In addition, possessing liquid assets can provide leverage during merger and acquisition negotiations, leading to a more favorable deal.
Less Reliance on Debt
Business owners and companies that maintain a solid foundation of liquid assets in their portfolios rely less on debt to fund operations and expansion initiatives. This decreased dependence on debt offers several advantages. When a business has a healthy cash reserve, it can sustain its operations and investments without relying heavily on external financing, such as loans or lines of credit. This independence can help the business bypass the costs linked to borrowing, such as interest payments and origination fees. Moreover, an impressive debt-to-equity ratio makes companies more attractive to investors and lenders.
Streamlining Cash Flow Management
By having liquid assets readily available, business owners and companies can more effectively manage their day-to-day expenses, such as payroll, rent, and inventory costs. Streamlined cash flow management is crucial to the long-term success of a business, ensuring that operations run smoothly and that obligations to employees, suppliers, and other stakeholders are met promptly.
Conclusion
Preserving liquid assets is essential for business owners and companies striving to stay nimble and competitive in today’s dynamic market landscape. Easy access to funds, freedom in decision-making, heightened negotiating power, reduced dependence on debt, and optimized cash flow management are just a few of the advantages that come with having a hearty reserve of liquid assets. By prioritizing liquidity, businesses can better navigate market uncertainties, take advantage of opportunities, and ultimately position themselves for enduring success.
