What would occur if you ever tried to navigate a stormy sea without a sturdy lifeboat? The same situation applies to the business entities as well. In other words, this is exactly what running a company without sufficient liquid assets feels like. That is why the businesses in Singapore put a lot of stress on managing liquid assets perfectly.
In this article, we look into the importance of having liquid assets for an enterprise in Singapore.
We will explore
What are Liquid Assets?
- These are valuable resources that businesses can quickly turn into cash without losing their actual market value. These include items like cash itself, marketable securities, bonds, and accounts receivable.
- The ability to convert assets to cash easily is important for companies as it ensures they can meet their financial obligations on time, avoiding late payments and reducing the need for loans or credit. Moreover, liquidity keeps businesses solvent. This means they can pay off short-term liabilities without struggling. This type of asset is classified as a current asset on a company’s balance sheet, and this certainly highlights its significance in daily operations.
- For example, cash is the most liquid asset, followed by stocks and bonds, which companies can quickly buy or sell through exchanges. Accounts receivable also fall into this category since it represents money expected from customers, which can be collected relatively soon. On the other hand, illiquid assets, such as real estate, vehicles, and machinery, cannot be turned into cash quickly and may lose value during the sale.
- These assets usually require more time and effort to sell and usually do not reflect their full worth when liquidated.
- Plus, the liquidity of any asset depends on its supply and demand. Those high-demand items like stocks and bonds are easy to convert to cash because buyers are readily available. Having enough liquid assets helps a company maintain financial stability, ensuring it can handle sudden expenses or capitalise on growth opportunities without needing additional external funding.
This is Why Liquid Assets are Important for a Company
Debt Management
Liquid assets play a crucial role in helping businesses manage their debt effectively.
These assets, such as cash, bonds, stocks, and accounts receivable, provide companies with the necessary liquidity to meet short-term debt obligations and make timely interest payments. When having liquid assets on hand, businesses can quickly access the funds they need to pay off their debts without any delays. This helps maintain a strong relationship with creditors, as companies that pay their debts on time build trust and credibility.
Fulfilling debt obligations promptly also prevents potential penalties, late fees, or damage to a company’s credit rating, all of which can increase the overall cost of borrowing in the future. Furthermore, having liquid assets available reduces the need for a business to rely heavily on loans or lines of credit, as they can use their own resources to cover financial commitments. This minimises the burden of taking on more debt and ensures the company remains financially stable.
Boosting Investor Confidence
Did you know that many investors in Singapore consider liquidity an important factor when evaluating a company’s financial health?
This is because liquid assets play a vital role in boosting investor confidence, as they signify a company’s ability to remain financially stable even during uncertain times. Investors usually prefer companies with high liquidity because it shows that the business can easily convert its assets into cash if needed, ensuring it can handle market fluctuations or sudden economic changes.
When investors see that a company holds ample liquid assets, they feel reassured that the business can meet its short-term obligations and manage unexpected challenges without depending on external funding. This gives them confidence in the company’s long-term viability. Financial stability becomes an attractive quality for potential and current investors, as it reduces the risk of losing their investments during times of economic downturns.
Moreover, liquidity also indicates that a company can seize opportunities quickly, whether by investing in new projects, acquiring other businesses, or expanding operations, all of which contribute to future growth. Investors want to feel secure in knowing that the company they invest in has the resources to grow and weather any storms. Liquid assets provide that safety net, making the company more appealing to those looking for long-term returns.
Minimising Financial Risk
You already know that this provides a reliable safety net during challenging times.
These assets offer businesses immediate access to funds without needing to sell long-term investments or illiquid assets like real estate or equipment. The basic idea is that having liquid assets on hand reduces the risk of insolvency, especially during economic downturns or periods of reduced cash flow, as they give companies the ability to cover operating costs and pay off short-term obligations.
When a company faces financial difficulties, the availability of liquid assets serves as a financial cushion. What does this mean? This shows its ability to prevent disruptions in operations and ensure business continuity. This becomes particularly important during sudden market changes or unexpected expenses, where immediate cash is needed to address urgent issues. If they can maintain a healthy amount of liquid assets, businesses can avoid the need to take on additional loans or raise emergency funds at unfavourable terms, which might otherwise increase their financial burden.
So, yes, liquid assets help companies remain flexible and responsive in times of crisis, allowing them to manage risks proactively rather than reactively.
Covering Unexpected Expenses
If you are from the business domain in Singapore, who knows better than you that businesses face sudden challenges?
This indicates issues such as emergency repairs, equipment breakdowns, or a sharp increase in the price of raw materials. Having liquid assets allows businesses to address these issues quickly without disrupting daily operations or delaying other financial obligations.
When a company can swiftly cover unexpected expenses, it avoids the need to take on short-term loans or sell long-term investments at a loss, which could negatively impact its financial stability. Liquid assets act as a financial buffer, ensuring that a business can respond to emergencies while maintaining smooth operations. This kind of flexibility is what is required to keep projects on track and prevent delays that might affect productivity or customer satisfaction.
Moreover, when companies have liquid assets readily available, they can better negotiate with suppliers or service providers. Also, they can take advantage of any price discounts or payment terms that may arise, further reducing costs. When having enough liquidity, businesses avoid the stress of scrambling for funds, ensuring they can maintain focus on long-term goals without being derailed by immediate financial pressures. This also helps companies remain competitive, as they can continue investing in innovation or expansion even when unexpected costs occur.
Another thing you may forget is that maintaining a reserve of liquid assets helps businesses prepare for seasonal fluctuations in demand or other market uncertainties that might impact cash flow. This approach keeps a company agile, responsive, and financially resilient, capable of handling unforeseen events with ease.
Loan Application
It is true that we stressed the ability to prevent taking unnecessary loans due to the latter. On the other hand, this would help with the loan application as well. Do you wonder how?
When creditors evaluate whether to extend a loan, they tend to look at the business’s ability to repay the loan on time. One of the key factors they assess is the amount and status of the company’s liquid assets, and it is an obvious fact everybody is aware of.
However, the interesting part is that these assets can be quickly converted into cash if needed, which reassures lenders that the company has the financial strength to meet its obligations even during tough times. Creditors want to minimise their risk, so they are more likely to offer loans to businesses that can demonstrate they have enough liquidity to make timely payments, regardless of any short-term financial hardships. A company with a healthy level of liquid assets can show creditors that it is not only able to cover its day-to-day operations but also capable of managing unexpected expenses without compromising loan repayments. This makes lenders more confident in the company’s ability to handle debt responsibly, increasing the chances of loan approval.
Additionally, liquid assets give businesses flexibility, as they can use these assets to secure better loan terms or negotiate lower interest rates. With more liquidity, a company does not appear desperate for cash, which positions it as a more reliable borrower.
Taking Care of the Liquid Assets of Your Company with Digital Tools
It is high time you understood that the future of your company depends on how well you manage its liquid assets. The problem is it is easier said than done. However, with the right digital tools, you can effortlessly monitor and optimise your finances, ensuring you are prepared for any economic challenge. A robust ERP system with an embedded liquid asset management module will secure your financial stability and growth. Therefore, make the smart move today with the right software partner in Singapore.