A healthy cash flow is business 101. You need it to pay suppliers and you need it to invest in growth. When you have a loyal pool of customers that pay on time, all is good. However, making sure you have a strong and fluid cash flow is not always so simple.
What should you do if a customer’s payments become erratic? Or what if you have the opportunity to expand into a new market? Do you insist on payment up front and risk souring the relationship with your client, or risk losing the new market opportunity to your competitor when they offer 30-days payment terms?
In some markets cash is king and customers never expect to be offered credit. However, if you do not operate in these you are likely to be familiar with the fine balancing act between managing financial risks, ensuring company liquidity, securing financial security and developing opportunities for growth. This can become even more tricky when trading during a period of economic volatility where high inflation, rising interest rates and supply chain challenges are impacting businesses.
Being proactive when it comes to protecting your cash flow from potential risks is vital. As trade becomes more sophisticated, so do the tools to address areas such as securing cash flow. We have some practical tips on the best ways you can optimise and secure your cashflow without demanding prepayments from your customers.
Cash flow forecasting
The importance of forecasting cash flow cannot be understated. Knowing your future cash inflows and outflows will help you determine whether you can cover your obligations while anticipating potential problems,but also which growth opportunities you can pursue so you can maximise returns and ultimately improve financial performance.
Knowing what is due, and by when, is important but is not enough on its own. Ongoing monitoring of trading risks will help you identify any areas of weakness that could result in late payments or even bad debts.
Identification of trading risks
Ongoing monitoring of all of your markets and trade relationships is vital. Although the future can be uncertain in a new, more volatile business environment, it is also crucial to consider the potential risks to your cash flow all the time, including with your regular customers.
Trade risk monitoring should include looking out for the red flags that can predict late payments and bad debts, in addition to any potential unexpected expenses and supply chain disruptions that could have a negative impact on your cash flow. This can be completed in-house or through third-party agencies. Ongoing risk monitoring is completed as standard as part of trade credit insurance policies and this information should be shared with you by your credit insurer.
Strategies to mitigate risks to cash flow
The strategies you can use to minimise and mitigate risks to cashflow include diversifying your customer base, implementing credit control measures, stabilising your supply chain and having a well thought through credit policy.
Of course, your strategy will include the basics for maintaining good cash flow including invoicing promptly, optimising payment terms and reducing expenses. However, you could also maximise efficiency through software that is integrated into your own financial systems.
Leveraging credit insurance to secure cash flow
Many businesses exploit the opportunities that trade credit insurance provides to secure cash flow. This includes the peace of mind that invoices will be covered as well as the intelligence credit insurers can provide on market conditions and individual business creditworthiness. Some businesses even use credit insurance to support their applications for better financing with their banks.
