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Loss of Liquidity – The Bigger Guys Saturday, 28 February 2009

Posted by R Garfield in Bemused, Oversimplified Economics.
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2 comments

In speaking to the Scott County Democratic Party, Jon Bowerbank made mention of the loss of liquidity his firm – a successful firm, with no duns or dings on record – has experienced as a result of the economic downturn. What this loss meant to his firm was that resources needed for his firm to do its job had to be purchased immediately from cash on hand before he billed his clients. In the pre-liquidity freeze days, the company could purchase the materials for a future job and pay for those materials at the same time or after billing the clients.

That may not seem like a huge change, because either way the materials do, after all, have to be paid for. But the change actually has a significant impact: less liquidity means more resources are tied up in each job; which in turn may limit the number of jobs being able to be pursued at one time. Even if it doesn’t limit the number of jobs, it would limit flexibility in responding to changes foe specific jobs.

Instead of the jobs paying for themselves as they go forward, they are instead being paid for by the prior jobs. If a client is late paying, company resources stay tied up even past job closure dates – further restricting liquidity.

There’s a cycle here, and it’s not a pretty one: the less liquidity available, the more providers – banks and credit card companies – seem to be moving to limit remaining liquidity. Because they are limiting liquidity, you have less, and because you have less, they lower it even further.

If this is the way the economy deals with a successful, strong, ongoing small business, then the impact on individuals would be even greater.

Note: this is my oversimplified thought process based on what Mr. Bowerbank said; at no point do I quote him directly in writing this.