While automated credits, low debt, and a strong profit and loss ratio are admirable qualities, if you don’t have the proper liquid assets, you could be playing with fire.
Why?
When it comes to e-commerce, you have to play the game right if you want your business to grow.
From covering unexpected expenses to solving inventory challenges and taking advantage of time-sensitive growth opportunities, balanced liquidity is vital if you want to scale sustainably.
Today, we’ve got the scoop on four tips you can use to increase liquidity and obtain a healthier e-commerce balance sheet for your online retail business. We’ll also give you the skinny on liquid versus non-liquid assets so you know how each one impacts the value of your store.
The scoop on liquid assets
- What are liquid vs. non-liquid assets?
- 4 proven tips to boost your store’s liquidity
- Ready for a healthier e-commerce balance sheet?
Are you thinking about selling your store? Find out how our Sellers Signals solution can help you optimize your store for the best offers.
What are liquid assets?
A liquid asset is anything of monetary value that can be converted into cash quickly and easily.
Liquid assets give you the cash you need, without adding to your liabilities.
As you grow your store, liquid assets can increase business equity and help you reduce lingering debt — a.k.a. every store owner’s dream, right?
What are liquid assets examples?
Here’s something else that’s interesting. Did you know that your e-commerce inventory and equipment are considered liquid assets?
It may sound surprising, but if you can exchange them for cash at any time, then…yes! They’re considered liquid assets.
Other types of assets include:
- Cash equivalents
- Stocks
- Bonds
- Mutual funds
- Cryptocurrency
- Accounts receivable
- Money market assets
To be considered liquid, an asset must tick the following boxes:
- Have many readily available purchasers
- Exist in an established and liquid market
- Have a secure and relatively easy ownership transfer
Is cash an asset?
Yes. Cash is a liquid asset in its purest form.
If you have cash on hand — or something you can easily convert into cash — then, tada! — you have liquid assets.
What are non-liquid assets?
Non-liquid assets, sometimes called fixed assets, are difficult to liquidate quickly. Not only does it take longer to sell these items, but the cash you receive may be lower than the market value of other assets you have.
Some examples of non-liquid assets include:
- Real estate
- Art
- Handbags
- Jewelry
- Cars
- Collectibles
- Watches
If you have a sudden obligation or debt that needs to be paid soon, non-liquid assets may not be the quickest or most lucrative option for you.
In other words, building up your liquid assets is a more solid game plan than relying on your non-liquid ones. There’s a caveat here, though. We’ll get to that in a minute.
For now, let’s get to those tips we promised.
Oh, hey there! Did you know that at SellersFi, you don’t have to put your personal assets at risk to secure funding for your store? Learn more by checking out this article!
4 proven tips to boost your store’s liquidity
Increasing liquidity and having a healthier balance sheet can help you prepare for the worst and secure your business’ future. Both are also helpful if your goal is to sell your store one day.
Let’s take a peek at four proven tips you can use to prepare for unforeseen expenses and promote business growth.
1. Identify your hidden liquid assets
To identify where you may be hiding liquid assets, think of yourself as a money-strapped college student searching for pocket change in couch cushions.
What valuable items do you have that you can quickly convert into cash?
For instance, do you have …
- Cash from FBA inventory that hasn’t been paid out yet?
- Physical bills and cash on hand?
- Cash reserves in your business checking or savings accounts that you can retrieve quickly and easily?
- Reserves in mobile payment service accounts connected to your e-commerce business like Venmo or PayPal?
- Money in your business savings accounts at a bank or credit union that bears a higher interest rate?
- Funds that you can extract from government bonds before their maturity date?
Identify and organize each hidden asset you uncover on a dedicated tracking sheet.
2. Understand the impact of liquid assets on your balance sheet
Knowing how your assets impact your balance sheet can give you valuable insights about your business like nothing else can.
Not only is your balance sheet an indicator of business performance, but it also informs you of what you need to pay off if you want to sell your business later.
Some key insights your balance sheet provides include:
- If you have enough cash on hand to pay bills
- Whether or not you’ve invested enough in your business
- If your e-commerce business has too much debt on its books
- Whether or not you have stale inventory
- If you’re withdrawing too much from your business and where to reinvest
- Your business’s net worth
By mulling over these insights, you can strategize how to grow your business, reduce debt, and boost liquidity. In other words, you get a tiny business guru on your shoulder.
3. Know what to do with non-liquid assets
Non-liquid assets can be tough to liquidate quickly, but if you have time to wait and are willing to increase the price, you can still turn them into cash.
Take a look at this example.
Alex owns two types of private-label inventory. One type is made up of top-selling items that rank on the first page of Google and sell quickly and easily on Amazon. The other type is made up of rare crystal collectibles that are priced high and can be appraised and auctioned off over time.
Private Label Inventory Group #1 can be sold on the open market.
Private Label Inventory Group #2 is sold through private marketplaces.
Alex is willing to accept a current market rate of 2.78% for Private Label Inventory Group #1. But since they’ll have more difficulty selling Private Label Inventory Group #2, they’ll only accept a higher current market rate of 5.62%, which drastically impacts the price and profit of these collectibles.
While it may take longer to sell these non-liquid assets, Alex can still wring out a decent return with this bump in price.
4. Pick the best liquidity ratios for your e-commerce business
By now, you might be wondering:
What determines a robust e-commerce balance sheet versus a weak one?
The good news is, it’s not as tricky as you might think to figure out. You can use some simple liquidity ratios to find out.
The following ratio formulas can help you understand the inner workings of your liquidity, such as:
- Your solvency
- What you can quickly liquidate
- Bankruptcy risks
- Low cash flow risks
- High inventory holding costs
Here are some of the top liquidity ratio formulas to use:
1. Current Ratio = Current Assets
Current Liabilities
The Current Ratio formula helps you understand your solvency by examining your total current liquid assets, excluding long-term assets.
The number you calculate is a measure that demonstrates solvency. In other words, for every dollar you owe someone else, you have a certain number of assets available to you. The closer that number is to one or below, the less solvent you are and the greater a solvency crisis you have.
2. Quick Ratio = Most Liquid Current Assets
Current Liabilities
Instead of traditional loans that’ll take time to pay off and prepaid expenses you’ll enjoy later, the Quick Ratio shows a more in-depth view of what you can liquidate quickly.
Again, if your calculation results in one or less, the greater a solvency crisis you have and the more likely you are to face bankruptcy and a serious cash crisis.
3. Inventory Turnover = Sales
Average Inventory
Inventory turnover measures how fast a company sells inventory and whether your relationship with inventory is sufficient or not. Your inventory selling speed is a critical indicator of your business’ performance — the longer you hold inventory, the higher the holding costs are.
Ready for a healthier e-commerce balance sheet?
Now that you’re armed with knowledge, it’s time to review your store’s balance sheet with fresh eyes.
What do you see? What opportunities can you spot? What can you liquidate? What’s your inventory turnover rate?
Use these insights to manage stale inventory, boost your liquidity, and understand where you’re at in your business. With the right growth plan and an eagle eye for the financials, you’ll be able to grow, scale, and/or sell your store in a way that supports your personal and business goals.
Thinking about one day selling your store? Discover how our Sellers Signals e-commerce analytics platform can help you optimize your store for the best offers.
