A member of the Academy of Preferred Financial Advisors, Cubby Bice is an experienced wealth management executive who has served as president of Bice Wealth Management in Mooresville, North Carolina, since 2004. Cubby Bice provides families and business owners with personalized financial planning solutions.
Liquidity planning is an important aspect of financial planning for businesses, since it centers on ensuring that an organization remains solvent over the duration of the plan. Liquidity planning can also serve as an effective element of attracting investors to a business.
A solvent business is a company that has the capacity to settle all its debts. Liquidity ratios can help determine whether a business is solvent and its level of solvency. For example, the current liquidity ratio divides a company’s current liquid assets by its current liabilities. If the current liquidity ratio is one, a business has the same amount of assets that can be used to settle its debts as it has debts. A current ratio of less than one means a business’ liabilities could outstrip its resources and the business could end up insolvent. Current ratio above one means a business could settle its debts and still have resources remaining.
Investors and creditors often prefer to invest in businesses with current liability ratios above one to minimize the risk of losing money to bankruptcy (a liquidity crisis). A business with a current liquidity ratio above two has more than twice the monetary value of its debt in liquid assets and has a low chance of going bankrupt. Because of this prospect, the business can easily obtain capital from other entities to finance projects.
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