How To Balance Liquidity & Profit For A Small Business

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Do you, your friend or your family member know a store that seemed to be doing well but suddenly closed shop?

Did you wonder why they closed up as you had noticed they were busy?

Did you wish they hadn’t closed up as they were your go-to place for certain needs?

Imagine if you could help your favourite store supposing things were in your control.

Well, you don’t have to imagine it; I’m on a mission to unpack how you can help if you were in charge. In this episode, I’m going to show what can help and why I believe it can help.

The solution, from my perspective, is £How to balance liquidity and profit. Is there a trade-off and why should you care how this impact your small business?

There is so much to unpack in this topic and that can take a lot of time. So, in this episode, i will focus on explaining from my perspective what I understand by liquidity and profit and why you should care about it.

Hopefully, there would be opportunity in the future to unpack more -such as- if you can have one without the other? Or the practicality of having both or even the possibility of having none. From a pragmatic point of view, you shouldn’t have to choose but if it ever comes to choosing at any time, which should you choose? So we'll leave all that for another time.

But for today,

Let’s unpack Why should you as an entrepreneur, care about liquidity and profit?

1.   in answering this, let’s try and explain profit. I see Profit as the measure of success in a business over a long term. And I would explain that. If you work somewhere, you want to get paid. What you are paid is the measure of your worth. – that is - How much your skill is worth. Now, in determining that worth, you will calculate the portion of your education that would go into the work, the portion of your living expenses and so on and so forth. For the work to be worthwhile, there should be a reasonable amount left after deducting these expenses that you can save or use at your freewill - that's the profit.

 

2. Next, let’s look at liquidity. Liquidity makes it possible to generate that profit. For example, a retailer supplies wholesale food items to a big chain store. The arrangement is such that the retailer gets paid when the store sells the items. Now, why would a retailer take this kind of deal? Well, because the big store has a crowd. What some people call the footfall. And in this example, let’s assume that they are in a prime location. Now, that store is in a good position liquidity-wise. Why? Because they have taken ownership of the products without cash flowing out of their business. Meanwhile, for these same products, they are collecting cash from their customers immediately. This means that by the time they pay the retailer, which by the way is usually about 30-60 days after they had sold the products, they would have created cash for themselves from the profit. Now, imagine the big store doing that with many retailers. That's how they scale. Then, compare that to a smaller store selling similar products but in significantly lesser quantities. The challenge for the owner of that smaller store remains how to put products in the store with a similar arrangement to the bigger store. And I say it's a challenge because in this instance, if the retailer took their products to the smaller store, the odds are greater that these products wouldn’t have been sold or fully sold at the end of 30-60 days. So, the retailer may likely be asking the small store to pay them at the point the small store takes ownership of the products. If this were the case, for the small store owner, their cash would be tied down until the customers buy the items. On the other hand, if that cash was not tied down, they would have used it to create more cash.

So, you see why you should care?

Then, how can you fix this? Well, Watch the metrics per time. Such as - the amount of cheques written and mailed, the amount of cheques yet to be written and when they would be due, the amount of cash represented by products, the amount of cash expected from sales, actual cash on hand per time, and so on. Ideally, you need systems to do this to be effective. And that's how you balance the trade-off. By watching the metrics, you control cash and how that cash is being used to create more cash for your business.

Well, in the interest of time, that's it for now. Hopefully, that makes sense in some way and helps. And I hope there will be an opportunity in the future to unpack so much more on this topic.

For now, wishing you all the best in your businesses, and… Remember - Let's continue to learn together and to keep on connecting.

Until next episode, cheerio!

 

This blog is about personal development based on the principles of fairness, compassion, and commitment. This includes the practice of 'speaking' positive affirmations, which can be a powerful tool to support self-development. Hopefully, you’re impacted positively in some ways. As we all know, personal circumstances are quite different. So, I encourage you to apply the lessons in line with your own context. Do continue to “Hola” to connect with people and remember “Let's continue to learn together and be encouraged to keep on connecting”.