Liquidity problems of logistic and distribution industry
Maintaining high liquidity in logistic and distribution industry is not quite easy because many distributors provide their customer’s flexible rule. With this, more time is consumed for trade receivables, which in turn, can affect the industry’s liquidity to decrease. Sometimes, the provision for trade receivables can turn to a bad debt or there may be some short payments which can bring a great loss to the industry.
The liquidity of the industry should not be higher or less. If the liquidity is higher, then it seems that too much cash is held in the industry and this can increase extra costs for the business. If the liquidity is too low, then the industry will not be able to pay it’s creditors or suppliers in time which can lead the industry to pay higher interest.
The ratios to find the liquidity of logistic and distribution industry
Current ratio is an equation to evaluate the firm’s ability to pay it’s short-term debts in the given period. The equation for current ratio can be determined as total current assets divided by total current liabilities. The answer should not be less than one. If the answer is less than one, then the company is trapped in paying short-term obligations.
Acid test ratio:
Acid test ratio is another ratio to evaluate the firm’s ability to pay it’s short-term debts in the given period. You can call acid test ratio as quick ratio. The equation for quick ratio can be determined by total assets less inventory divided by current liabilities. Many make a major mistake when calculating quick ratio because they subtract inventory without including it in the current assets. This can mislead the industry.
So, you should include inventory under current assets and then again subtract with the total current assets. Acid test ratio provides an efficient result for the industry’s liquidity. The result should be 1:1 or more to meet the acquired liquidity to pay the short term payable.
How can we maintain a high liquidity in logistic and distribution industry?
If you want to maintain a higher liquidity, you should receive the current assets quickly into your industry. For that, you should post certain regulations for the creditors. You should reduce the period of trade receivables. You should reduce selling goods in credit and sell in cash basis. High interest must be charged for late payments. You should stop sending goods to the customers until they pay their pending debts. This will reduce the risks of bad debts.
You must get rid of unwanted stocks in your industry which creates extra costs. If you follow these methods and tasks, you will be able to pay your creditors quickly and get the benefit of cash discounts. If you have high liquidity, the bank manager will be more willing to offer long-term loans with low interest rates. You can also take advantage of Freight Factoring.