7.2.3 Focus on Liquidity

Your balance sheet may show that your company is financially stable, but it does not necessarily imply that your assets are liquid. To be able to pay immediate financial responsibilities, you should aim to have more assets than liabilities.
And the experts in charge of those outside funding sources, such as factoring for inventory and receivables, will count on you to be aware of your liquidity situation. While cash, not P&L, should be your primary metric, all businesses should also monitor other crucial KPIs including the cash conversion cycle (CCC), days sales outstanding (DSO), days payable outstanding (DPO), and days inventory outstanding (DIO).

A “cash committee” might even be formed by some small businesses to constantly monitor daily indicators and provide updates on the liquidity status.