When you decide to set up your own business, you have to reckon with the risks it entails . The main one is a drop in the company's turnover and, ultimately, bankruptcy. According to statistics, this is most often caused by a loss of liquidity. How to deal with such a crisis situation?
Numerous competitors, marketing stumbles or the failure of a product or service to catch on in the market are just a few of the problems leading to business failure. Each of these is directly linked to a reduction in the profits generated and, consequently, a loss of liquidity in the company.
What is liquidity?
Liquidity is the ability of a company to cover all costs, expenses and financial obligations on an ongoing basis. Having liquidity is nothing more than the ability to pay employees' salaries on time, to settle accounts with business partners and to purchase the things necessary to run the business.
In the event that any of these obligations becomes problematic, the entrepreneur must realise that the liquidity of his/her company is at risk. In such a situation, what counts above all is a quick reaction and appropriate action to prevent the company from going bankrupt.
What can indicate a loss of liquidity?
Loss of liquidity can also be evidenced:
- arrears to US, Social Security or cooperating companies (e.g. suppliers),
- a progressive decline in the bank balance,
- increasing levels of short-term and long-term arrears,
- an increase in the number of stocks in storage while production levels remain constant/decrease,
- lack of money to pay current affairs.
It is rare that a company facing a loss of liquidity faces only one of the problems listed. Usually, a reduction in budget capacity manifests itself through the simultaneous occurrence of several of these symptoms.
How to deal with loss of liquidity?
In the event of observing any indication that a company is losing liquidity, preventive action should be taken as soon as possible. To this end, it is important to thoroughly investigate the problem by analysing the structure and dynamics of current assets. This will enable the best countermeasure to be selected.
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Debt repayment obligation
One of the most amicable ways to prevent a company from going bankrupt is to draw up a debt repayment undertaking. By this term is meant a statement of intent to settle the outstanding debt at a later date. It is important that the document is structured correctly.
A debt undertaking can be drawn up by yourself using ready-made templates. It must contain elements such as: the date and place of drawing up, details of the person in debt, data relating to the debt (these are to be found in the letters from the creditor or collection company), a statement of the amount of the debt, as well as a declaration of the date on which it will be repaid.
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Debt collection
Debt collection will work when a large number of invoices unpaid by customers is responsible for a loss of liquidity. However, such a solution may cause us problems on the line of contact with counterparties.
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Use of stocks
The funds needed to deal with a crisis situation can also be obtained through the use of accumulated stocks. This means getting rid of a hedging budget, but in a situation where a company is on the brink of insolvency, what counts above all is a quick response.
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Advances from contractors
If the company's financial problems are of a temporary nature, a good solution may be to ask contractors for one-off cash support in the form of an advance payment for future sales of products or services provided. However, it is important to encourage them to do so with favourable terms of the contract to be concluded.
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Finding an investor
The first symptoms of a company's loss of liquidity can also be a motivation to find an investor. The success of such a venture largely depends on the type of business and the current situation of the company. However, it is worth trying, as the investor will not only provide funds to pull the company out of its problems, but also to cover the costs associated with its further development.
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Credit
Credit is probably the most common way of dealing with a liquidity problem. A one-off injection of large cash should be fully used to pay current obligations and settle the most urgent matters. Entrepreneurs can take advantage of both ordinary loans - investment or working capital loans - as well as special offers offered by some financial institutions.
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Factoring
In the event that no bank is willing to grant the entrepreneur a loan, he or she can use factoring services, which largely focus on the financial health of the counterparties, putting aside the financial situation of the company. The whole procedure consists of a factoring company buying out the entrepreneur's outstanding receivables from the sale of goods or services.
