# 380 - Why liquidity is my obsession (and should be yours too)
What is liquidity
Right, so this week we’re tackling liquidity. That’s quite an accountanty word, so what does it actually mean?
Liquidity is how easily you can get your hands on cash when you need it; whether it’s to pay salaries, suppliers, your VAT or corporation tax, or unexpected expenses.
As you probably know I like to keep things simple and easy to understand, so my rule is that you need to have all of your taxes, and at least 3 months overheads put away in high interest accounts that you don’t use for trading.
Why? Well tax isn’t your money. End of. You’re just collecting it for HMRC, so it should never ever be part of your day to day cash flow. Stick it away and forget about it until it’s due.
Why do you need these cash buffers?
We can’t predict the next crisis or bump in the road but we can be sure there will be one.
You could lose a big client, the economy tightens, new business dries up, debtors take longer to pay their bills, clients start reducing their retainers - I know you’ve experienced this.
Since Covid we’ve been in a perma-crisis state and everyone is on high alert. Take the upcoming budget as the latest example; New business decisions are on hold again (yes again) whilst we find out how hard the new government is going to hit small business.
The only way to be protected against uncertainty is having an overhead buffer; you’ll have time to think and plan, without knee-jerk cost cutting.
Another important consideration here is the impact on your personal wealth building. When cash is tight and there’s no buffer, business owners often cut their own salaries and pensions, which can have a significant impact on their future wealth.
And not having overhead cover means you only just have enough cash going round to cover your outgoings. Nothing left over, no rainy day buffer. And whilst thousands of businesses accept this as their reality, it’s not ok. And it’s a really risky way to run a business.
Lack of cash strangles growth
Assuming you don’t want to just get by and you have plans to grow and build wealth, you need cash available to take advantage of opportunities, to be able to hire that great new person, invest in a marketing or training program. A cash-strapped business stays stuck—marketing is cut to the bone, and staff aren’t getting the training they need.
Tight cash flow doesn’t just impact growth—it impacts your mindset. It puts your brain and nervous system in survival mode, narrowing your focus to short-term actions and creating decisions based on fear.
How do you build liquidity?
By now you’re either smugly thinking “yep, I’m all good, taxes put away, 3 month overhead buffer, tick tick”
Or “hmmm I definitely don’t have these, what can I do about it?”
Liquidity can only come from 5 places:
Making and keeping profit. (which is why my obsession #2 profitability is so important).By far my favourite method. If you’re not generating and keeping profits then you need to urgently look at your business model. I’ll be unpacking this more next week.
Capital you put into your business. This is usually only something done at the start of a new business but is worth considering if your cash flow is stifling your growth
Taking on some form of debt. I’m not a fan of debt, I prefer cash to come from profit, but if lack of cash is holding you back, AND you’ve got a sound profitable business, there is a place for debt - as long as repayments don’t put you at risk.
Improving your working capital; collect your debtors faster, get better supplier terms, convert your WIP faster, invoice clients sooner, get payment up front
Selling business assets; sell off business assets you don’t need or that aren’t giving you a return.
Liquidity might seem like just another accountanty thing, but it’s actually the backbone of your business. Without it, growth is impossible and uncertainty becomes BAU.
One of the biggest reasons to run and build a businesses to create your personal wealth and protect your future - and for that you need strong cash flow.
So the killer question, how strong is your liquidity? Be brutally honest with yourself And if the answer is “not great” what action can you take this week to start improving it?