Cash Flow & Working Capital Lines of Credit

What is Liquidity and Cash Flow?

is the term used to describe how easy it is to convert assets to cash. The most liquid assets, and what everything else is compared to, are cash. This is because it can always be used easily and immediately.

Cash is your Small Business’s lifeblood. In other words, if your Small Business can sell lots of widgets and has good net earnings, but can't collect the actual cash from your customers on a timely basis, the company will soon fold up, unable to pay its obligations.

The concept of the Cash Cycle is also important in understanding the liquidity of your Small Business. Cash continuously cycles through the operations of the Small Business. A company's cash can be tied up in materials, inventory and trade debts. It is not until the inventory is sold, sales invoices raised, and payments on accounts payable are made that that your Small Business receives cash. The cash tied up in the cash cycle is known as working capital and liquidity ratios like Current Ratio try to measure the balance between current assets and current liabilities.

Current Ratio compares the level of current assets to current liabilities (current assets ÷ current liabilities = Current Ratio). "Current" mean collectable or payable within one year. Depending on the industry, companies with a good liquidity will usually have a Current Ratio of more than 2-to-1. This shows that the company has the resources on hand to meet its obligations and is less likely to borrow money.

Working Capital is the amount by current assets exceeds current liabilities. Also called Net Working Capital, it is another measurement of a company's ability to meet current obligations and how much liquid assets a company has available to build its business.

A working capital Line of Credit lets your Small Business tap into funds to bridge gaps in the company’s cash flow cycle. It gives your Small Business credit for ongoing needs such as seasonal working capital or inventory management. It can also help your Small Business boost revenue by allowing your company to finance new revenue streams instead of borrowing from their savings or turning away new business.

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