Liquidity are the resources available to you pay your bills. Usually it’s cash; it always needs to be something you can easily convert to cash. Liquidity risk is the number one issue to manage and the lack of liquidity is the number one reason why start-ups fail. If you want to have an ongoing enterprise and you should be conservative and minimize your risks. Some typical risks to consider include:
Underestimating cash out flows.
Always leave yourself a cushion for just in case events. You may need a little more marketing investment, better computers, more staff. Shoot for 6 months of extra cash and plan to have standby or emergency capabilities if you need them (friends and family, crowdsourcing, credit cards, etc.
Over estimating cash inflows.
Make sure your estimates aren’t too rosy on the sales side. It is easy to go a little crazy with overly optimistic sales forecasts. Be reasonable. Also, be aware that completing the sale is great but your ability to spend money depends on when you collect the cash.
Poor quality liquidity tracking.
This issue is so important that you need to keep a laser like focus on it. You will have a lot of things to work on in a start-up and it’s possible to get distracted. But always keep an eye on your bank account and put alerts in place in advance to notify you of important changes, especially as they relate to your plan. Don’t wait until the last minute to try to solve a liquidity problem. You will pay dearly for that and may in fact lose everything you’ve worked for.
Liquidity management is a fundamental part of planning for your business.