It is becoming increasingly difficult to stay liquid in this difficult economy. With banks keeping a continued tight grip on their cash, it’s making it hard for business owners and individuals alike to get the cash flow needed to keep their heads above water. While it might seem like a losing battle, by making an effort to reduce expenditures and understand where your resources lie and how best to utilize them, you may be able to make it through a rough patch. Whether you are running a business or managing your individual finances, here are some tips to help you stay liquid, even during rough economic times.
Ladder Your Investments. When it comes to your excess cash and what to do with it, you can be left in a head-scratching dilemma. Do you look to long-term investments to get a better return on your cash? How much do you invest? And how much do you leave on hand as a source of current liquidity? Whether investing your available cash in bonds, certificates of deposit, buying necessary business equipment and supplies, or increasing your inventory, laddering your cash by spreading costs and/or investments over a variety of prices, interest rates, and timeframes, can be a great way to insure continuous cash availability. This technique can help to ensure your cash isn’t tied up all at once and that there are consistent sources of available liquidity constantly becoming available. A brief example of laddering might be taking a lump sum of $12,000 and investing $1,000 in a 12-month CD each month throughout the course of a year so that by the end of the year, the first CD will be coming due, just as you invest your last $1,000.
Diversify. By diversifying your business and/or investments, you can better protect yourself against a cash shortfall. If you have a number of income streams, when one runs dry, another may supplement that loss, providing additional time to make up for that loss in other areas.
Don’t Overextend. When things are good, it can be difficult to restrain yourself from overextending your available resources. Extra costs, investment opportunities, and a seemingly secure income can make it easy to lose sight of protecting yourself against a liquidity freeze. If there's one lesson to be learned from the credit crunch it's that no matter how good things look or how secure your business and investments seem, it is important to safeguard yourself against a lack of liquidity by not overextending your available cash on hand.
Accounts Receivable. Either as a business owner or as an individual, your accounts receivable can be an important source of liquidity in a pinch. For business owners, you’ll certainly want to keep a close eye on your AR sheet, especially if it continues to expand rather than shrink in times of tight cash flow. As and individual your accounts receivables might be quite different from those of a business owner, but you might still have some outstanding cash to count on when times are tough. An undelivered tax return, a personal debt someone owes you, vacation time that can be cashed in at work, and similar cash sources can be important ways of staying liquid.
Reserves. Reserve sources of cash may be something you’d prefer not to touch, but they can be lifesavers in times of a funding shortfall. Credit cards, lines of credit, and emergency cash accounts can all be possible options when it comes to staying liquid. Even when times are good or if you don’t ever plan to use them, it can be important to keep those sources of reserve cash available just in case.
Keep an Eye on Overhead. Decreasing overhead costs can be a great way of helping you stay liquid. While lower costs might not be bringing in extra income directly, it can save you cash, which is just as good (maybe even better since you likely won’t have to pay taxes on it) in a liquidity freeze.
Understand Asset Value. Whether you are the owner of manufacturing equipment, farm machinery, government bonds, rare coins, or valuable antiques, knowing what your investments and assets are worth can make them easier to turn into cash, if or when the time comes. If you have evidence or documentation of an asset’s value, whether it is by way of receipts, an appraisal, or similar documentation, this can make it quicker and easier to convert the item to cash.
Cash in on Assets. When it comes time to convert an asset to cash, it can also be important to understand how best to do so. Understanding where to exchange your assets for cash, knowing where to get the best price, or already having buyers lined up, can unfreeze much needed liquidity quicker.