It’s no secret that business owners have far more risks to manage than most, and far more to take advantage of.
When times are tough in the US economy, or a competitor is in a weak position, or there is an unexpected shock to the industry – having ample liquidity allows you as the owner to minimize a risk and maximize an opportunity.
Here at Consolidated Planning, our approach to your business is to help you adequately protect, grow, and exit on your own terms. This means focusing on current challenges that you’re facing to coordinate solutions that address your financial concerns while uncovering areas for opportunity even after you retire.
In this article, we’ll review your potential liquidity needs while running your business, how that liquidity compares to what’s needed for your ultimate exit, and how you can work to upgrade the quality of your liquidity for a better tomorrow.
What is Liquidity?
Your liquidity as a business owner is what’s in your reserves if the cash flow were to stop. This is your cushion, your spare tire. Your source of liquidity can’t be something that is already earmarked for expenses or income.
Liquidity While Running Your Business: Dangers & Opportunities
As you know, the purpose of liquidity is to manage dangers (risks) and take advantage of opportunities. As a business owner, you have much more cash on hand than the average person because of the higher level of risk to manage. You’re also playing a bigger game for opportunities.
The problem is that these dangers and opportunities can come at any moment. Even with the knowledge of your business and the industry, it’s hard to see around all corners. That’s why ample liquidity allows you to react in a strong way when competitors are unable, scared, or even out of business.
While running your business, you have to think about liquidity as a protection tool, a self- insurance tool. This means shock-absorbing your business for various reasons, including:
- Economic factors like a sudden recession
- A key competitor goes under, with assets to sell
- A real estate deal for your company springs up
- A new business idea falls in your lap
- Industry regulations that change how you do business
- Costs unexpectedly rise
- And so much more
If you’re successful, you may already know the importance of your liquidity while running your business but what does that look like after you exit your business?
How Does Your Liquidity Transfer After You Exit Your Business?
Let’s say you’ve sold your business for 5M and you’re now living off that portfolio. Now, what is liquidity’s role in your life?
It’s the same thing but you’ve simply traded in your business risk for different types of risk, including market risk, interest rate risk, longevity risk, and frailty risk.
For example, maybe you were counting on the interest and dividends from investments to provide you with 4% from your business sale proceeds – enough to pull off to pay your bills, but the market went down 10%. While markets generally do rebound, they don’t do so immediately. Yet, you’re retired and need income today from what was your 5M investment portfolio that just took a 500k unrealized loss.*
Sell high, buy low.
This adage is how wealth is managed for stocks and bonds, and it’s no different when you’re in retirement. If your portfolio is suddenly down and you know that a recession might keep it down for months or years, you need to have a pre-planned strategy to not sell until markets fully rebound. Don’t sell low!*
True liquidity, like extra cash or other cash equivalents, gives you a go-to place to pull from in down markets. Instead of selling portfolio positions when markets are down, you simply plan on markets being down and use your ‘extra liquidity to fill that gap. When markets rebound, and they will, you’ll simply go back to your portfolio that is again 5M of value (or hopefully greater.)
Liquidity not only protects you and your family from taking big losses at the wrong time but also gives you more money in the long run.
Upgrade The Quality of Your Liquidity
Making liquidity a priority as a business owner as well as after your exit is an absolute must to protect yourself and your livelihood.
And you want liquidity even if there is a 0% return. This is still better than no liquidity at all. Far and away. However, you CAN work to upgrade your liquidity.
But, maybe you’re wondering why you wouldn’t increase liquidity? We’re not saying you can’t but upgrading its quality may be more beneficial to you.
Upgrading your liquidity takes a good thing and makes it better. You can upgrade the quality of your liquidity in a few ways:
- The yield or return of the liquidity
- The tax status
- Reducing term insurance cost
To better understand tactics to upgrade the quality of your liquidity, talk with a business planning professional at Consolidated Planning.
2024-173043 Exp. 4/2026
Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.
This material contains the current opinions of Neal Brincefield and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.
* All scenarios mentioned herein are purely fictional and have been created solely for educational purposes. Any resemblance to existing situations, persons or fictional characters is coincidental. The information presented should not be used as the basis for any specific investment advice.
*All investments contain risk and may lose value
