Financial & Credit Risks

Cash Flow Management: Data-driven Strategies Can Minimize Risk

How to Manage Cash Flow

The goal of cash flow management is to keep a business’s income higher than its expenses at any given time. In layman’s terms, this means that a business should be earning more than it spends.

When a business takes cash flow management seriously, payroll, rent, and other overhead costs aren’t left to chance. Companies that fail to manage cash flow may find themselves unable to access the funds needed to operate, resulting in growth stagnation or outright failure. These high stakes make cash flow management a major component of minimizing financial risk.

Cash flow management has always been a prerequisite for running a successful business. One component of cash flow management that many entrepreneurs find valuable is the effective use of business data and analytics to evaluate cash flow risks. Here are several ways companies use data to optimize their cash flow with precision.

Using Business Data to Protect Income

In a nutshell, a company needs a reliable revenue stream and influx of cash in order to stay cash-positive. For business-to-business firms, this usually hinges on invoices being paid on time. When due dates come and go without payment, a business may find itself short on cash to pay its own debts. Collecting on accounts receivable keeps companies solvent.

One way to understand the risk of non-payment for a specific company is to review all the data you can find on the business. Such information is valuable whether you’re evaluating a potential customer or simply keeping tabs on an existing client. Elements such as trade references, financials, and geographic data are some of the insights that may help business leaders segment and diagnose slow-paying businesses.

Businesses don’t usually promote their challenges and setbacks. Even public companies often try to put a positive spin on unsettling news. A variety of third-party data collection tools exist to help businesses understand the financial health of other companies. For example, Dun & Bradstreet makes such information available via a variety of products, including D&B Credit and Dun & Bradstreet’s Business Credit Reports.

Gaining increased transparency into the financial performance of another business helps decision makers better understand the risks associated with their portfolio of clients. Similarly, business development teams can use such tools to decide whether to engage with a potential partner or not. There are multiple indicators that can be used to assess risk, including:

Business Credit Scores & Ratings

Business credit bureaus are continually collecting information on companies all over the world. This data is used to calculate a variety of business credit scores and ratings that make it easier to understand the financial health of a company.

For example, D&B’s PAYDEX® score is a dollar-weighted indicator of a business’s past payment performance. Such scores make it easier to understand the potential risks another business may present to your cash flow.

Liens & Legal Judgements

Liens can be placed upon inventory, real estate, or equipment to compel a company to make good on its debts. The best business information tools collect this data from trustworthy sources, such as government records. Previous or current legal issues could suggest that a company may present an unacceptable level of risk.

Trade References

Past payment behaviors by a company can help a business anticipate how its own invoices may be handled. These trade references are voluntarily provided to business credit bureaus by vendors, lenders, landlords, and other partners. This level of visibility into late payments or defaults can protect your business’s cash flow from unreliable partners.

Cash Flow Management & Spending Decisions

Accurately projecting a business’s income is one part of cash flow management and optimization; responsible spending is the other. The business information mentioned above is equally useful when evaluating suppliers and partners. If you rely upon a business partner for goods or services, their failure can threaten your company’s balance sheet.

Conducting research into the reliability of another company can remove poor candidates from consideration. This level of insight should make your cash flow projections more useful.

Data Quality is Key to Managing Cash Flow

When making decisions that impact cash flow, your plan is only as good as the data. It’s imperative that the business information being referenced is up-to-date and accurate. And managing risk requires stakeholders to be aware of new developments that could threaten cash flow.

Business data should be collected from reliable sources, such as government agencies, public financial documents, court records, and trusted research firms. A business’s financial situation can change rapidly. Several data providers offer continuous monitoring and automated alerts when financial indicators take a turn for the worse.

Understanding the fundamentals of how data is collected and delivered is important to effective cash flow management. Incorporating these insights can help businesses respond to the many risks that face every enterprise.

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