Getting a Handle on Cash Flow
The idea behind cash flow management is simple: ensure that the business is earning more than it spends. Fixed expenses include things like salaries, rent, utility bills, or insurance. These can be predicted with a high degree of accuracy based on what you’ve paid in the past. Variable expenses are more difficult to pin down, such as the cost of raw materials, overtime wages, or fuel. Late payments from customers also fall into this category. Excessive variable expenses make it difficult to keep a handle on cash flow. Because of this, managing business credit risk is essential to the overall financial health of a company.
Making Trade Credit Work for You
Trade credit is a useful financing tool that allows one company to invoice another for goods or services. This effectively extends funds to the borrower, who has to repay the debt by a certain date.
The lender assumes significant risk when selling on trade credit: the customer may pay late or not at all. It can be difficult and costly to pursue a bad business debt, so companies need to set reasonable credit limits to avoid overextending themselves.
Reviewing a business's credit scores and ratings can help vendors evaluate a potential borrower. Knowledge of how a company handled past debts is often the best guide for setting your own trade credit terms. In some cases, you may decide that invoicing is simply too risky. Actively managing business credit risk may help avoid costly delays or defaults.
Other Types of Financial Risks Facing Businesses
Liquidity risk, asset-backed risk, and foreign investment risk also fall under the umbrella of financial concerns that can threaten a business’s bottom line. Here is a brief review of these financial risks:
- Liquidity risk affects a business’s ability to realize value from assets or access capital.
- Asset-backed risk refers to changes that might lower the value of a holding, such as a loan. A customer prepaying their debt falls into this category, as the lender wouldn’t earn as much interest as they expected.
- Foreign investment risk concerns changes brought about by the actions of a government. More aggressive taxation or political turmoil are examples.
As you can see, businesses face a variety of financial risks that can sap their earnings and stifle growth. Anticipating these risks, and taking steps to reduce your exposure, is an important part of a business’s overall growth strategy.
The articles above can help you learn about financial & credit risks, along with how data enables companies to more accurately assess the threat posed by other businesses.