Liquidity: Unpacking This Common Term for Your Organization

What does Total Liquidity Mean for a Business? You Came to the Right Place to Learn More

I am certain you all have heard the phrase “cash is king” either in your business and professional endeavors or some other avenue of your personal lives.

When you take a step back and really try to understand that simple meaning behind that adage, it indicates how important cash is - perhaps the most important - for any one business or organization.

But despite the simplicity of the phrase, what it fails to account for is other very important components that can contribute to cash, especially for when a business needs it most.

So instead of thinking that “cash is king,” we will take the liberty in changing the phrase to “total liquidity is king” and we’ll explain why (even though it certainly does not have the same ring to it, right? 😉)

Liquidity: Explained

In its simplest definition that is most widely accepted across the finance and business world, total liquidity is defined as the total cash and available, undrawn debt financing you have on hand.

Other times, folks will choose to include other liquid investments and accounts receivable in this metric. There is not necessarily something wrong to doing so, but for the tightest and simplest definition / calculation of the metric, these are typically excluded.

Why you may be asking? It is because these types of assets require more time to “liquidate” and get to your business, especially when you are in an extreme need like making a biweekly payroll run at the end of your cash balance. Unlike cash or debt you can drawn on almost immediately if/when needed (assuming banks are still in business… 🙂 💰️ )

So not only is liquidity important, but the definition and what goes into its calculation is also important and nuanced. This is good foundational context to have, as it gives you the insight to start to implement tracking and using this metric to run your business.

You will start assessing business investment decisions with total liquidity in mind, making sure you evaluate the return-on-investment of certain projects is defined and discrete because the amount of money you will have to invest (from your total liquidity) is certainly discrete.

Additionally and even more bluntly, in order to remain in operations, every business should always be cognizant of having enough liquidity to meet its near and long-term obligations. That can be something like paying your employees and key vendors or being able to make a debt payment that is coming due within the next 6 months.

Tracking it regularly can come in the form of making sure you have adequate financial reports and bookkeeping, as well as keeping weekly and monthly cash flow reports to understand how / where you are using or obtaining cash flow.

Beyond that, having a finance professional or a tool help you forecast your cash flow based on your known operating, investing, and financing activities can take you to the next level to know when you are in need of more liquidity or if you have enough “runway” to operate your organization.

But regardless of all this, make sure you add it to your most important key performance indicators (“KPIs”) because liquidity keeps the lights on (and reduces a lot of future pain and headaches for you as a manager / business owner).

Valuate Gives You Insight into Liquidity and Many More Metrics

For the new, inexperienced, or even the most seasoned management team members, operators, and business owners, staying on top of all financial metrics and collaborating with internal and external team members is time-consuming and arduous.

That is another reason why we chose to create Valuate - to provide these folks all of their relevant metrics and insight behind these metrics, like how they compare to benchmarks and how to improve the metrics practically across their daily business actions.

While our journey 🚀 is just beginning as we work through a web application that can plug into a company’s financials and provide you the tools and recommendations to explore, we provide weekly newsletter content like this article and free insight on our social media platforms (LinkedIn, X, Instagram).

So follow along for more and shoot us more ideas on content you’d love more insight on!