Growing up, my family – cousins and all – would spend our summers at my Aunt & Uncles cabin in Lake of the Woods, ON. We’d be in our bathing suits from the moment we woke up till dusk (when the mosquito’s would swarm and we’d be forced inside). We’d race down to the dock and cannonball in.

The best was when we got creative enough (fueled by treasure-adventure-dreams care of the Goonies) and jimmied up every floatie and raft hanging around to create a cousin caravan. We’d tie them up together and paddle around to all the little islands in the bay to see if any pirates had come before us and forgot to claim their bounty. Needless to say, we never struck gold, but the years we spent wandering the lake on our own (it was the 80’s after-all) was the ultimate kid-topia.

As an adult, I now realize things I was completely oblivious to as a kid. Who knew all those rafts and floaties didn’t get inflated on their own?? And our picnic lunches apparently didn’t get delivered by Skip. And did you know that there was no one turning the water on or off each year that made the lake rise or lower??

One year my parents and aunts & uncles had to build a floating dock, cause the old dock didn’t reach the water anymore. This ebb and flow of the lake is a great way to think about the money in your businesses…some years, the water (aka your cash) is nice and high, making cannonballs off the dock thoughtless and fun; other years, the water’s low, and unless you’ve got a floating dock, you’re maybe wading out there with a bit more caution.

This is LIQUIDITY – understanding if you have enough cash and “near-cash” assets to cover your payments and debts. It's about having enough on hand to cover your immediate expenses without having to sell everything and hold a "Going Out of Business" sign.

LET'S TALK RATIOS (IN PLAIN ENGLISH)

There are a couple of calculations that can help understand how LIQUID your business is. Don't panic. We're not going back to math class. But we are bringing back assets from last week’s blog.

1. Current Ratio: This one is all about comparing your current assets (stuff you can turn into cash quickly) to your current liabilities (bills you gotta pay soon). The formula is:

= Current Assets / Current Liabilities

Ideally you want this ratio to be around 2:1. This means that for every dollar you owe to vendors or banks, you have $2 in cash, inventory or other current assets. If it's less, you might want to look into having more readily available funds.

2. Quick Ratio: This takes the current ratio and makes it a bit stricter by removing inventory.

= (Current Assets - Inventory) / Current Liabilities

This shows you how much cold-hard cash and owed cash you’ve got to pay those same vendors/debts. This one you want to be more like 1:1. A one-to-one match means you can pay your short-term debts without selling a single product! Check out my blog about balancing sheets HERE where I elaborate on the relationship between assets and liabilities.

HOW TO REDUCE YOUR BILL PAYMENT ANXIETY

The more “liquid” your company is, the less anxiety you’re going to feel when it comes time to pay those bills. There are a few ways to get things flowing a bit better:

Pay attention to clients that owe you money: Are your clients pushing the limits on paying you? If you offer your clients payment terms – like NET15 or NET30 (which means you give them 15 or 30 days to pay their bill) – is it becoming more like 20 or 45 days before you’re actually collecting?? The longer it takes for clients to pay you, the more difficult it can be for YOU to pay YOUR vendors or debts.

Smart Inventory Management: Don't overstock; keep inventory levels aligned with demand. It might seem like a great deal to save 30% more if you buy 10,000 items, but if it’s going to take you 3 years to finally sell those items, is it really worth it?

Save a Rainy-Day Fund: Build up some savings for unexpected expenses. Operating with just enough is ok but what happens when your computer craps out or you get the opportunity to go to a great training course? Having a rainy-day fund will help you deal with the happy (or crappy) surprises along the way.

Avoid Unnecessary Debt: Borrow wisely, and don't go overboard. A little bit of debt can smooth out the rough patches; a lot just ends up adding to the stress. Choose Wisely.

Remember, liquidity isn't about having a Scrooge McDuck-sized vault of money. It's about balance, knowing where your business stands, and having a vision for where you want it to go. Don’t be intimidated by the numbers – they won’t hurt you but they CAN help you zone in on some areas to tweak your business and go from “getting by” to great!