Liquidity—defined as cash or near cash, such as bonds and stocks—is a vital asset to a business.
How much is the right amount of liquidity to carry on a firm’s balance sheet? Berkshire Hathaway and Apple, to name two large, publicly-traded entities, have literally billions on their balance sheets. The companies have amassed a cash trove.
Cash or near cash is used for two primary purchases traditionally: investments and stock buybacks. But you should consider how critical it is for prompt payments and your rating.
Investments, such as acquiring other businesses, can be a good use of cash. Stock buybacks are also considered to be a strategic use of cash—earnings per share increases when the amount of a company’s stock is purchased, but most produce companies are privately owned, so this doesn’t apply.
What is important to most fresh produce companies is maintaining enough liquidity to pay vendors in an agreed upon time, generally not beyond 30 days, given PACA regulations. Should a business decide to pay vendors in 21 days, it will need to model its working capital (current assets minus current liabilities) in a manner that will allow for this to occur.
Blue Book ratings assist in deciding to whom to sell and on what basis. Consider receiving two calls from prospects desiring to purchase your product. One has a rating of 500M XXX B and the other is rated 100M XXX148 D. Which one would likely get your business?
The ability to pay, measured by the amount of liquidity needed to pay bills in a prompt manner, is something to which all businesses should give much thought.