Accordingto a recent study by U.S Bank, about 82% of small businesses fail due to poormismanagement of cash flow. But how do you know that? Cash flow mismanagementoccurs if your expenses exceed your cash. Withoutpositive cash flow, a company cannot meet its operating and financialobligations. Thus cash is a lifeblood of the business it must be pure andrunning.
Most often cash in a business comes through investing activities andthrough customers. Many a time’s customers are unable to pay for products andservices they buy due to some constraint and in return, the seller issues aformal invoice also known as Trade receivable. Tradereceivable means outstanding invoices of a company or the money, the companyhas, which is unsettled from its customers. In a company’s balance sheet, tradereceivable is often recorded as an asset because there is a legal obligationfor the customer to return cash for the debt. Accounts receivable are often abusiness largest asset. If your customers are unable to pay what they owe,potential credit losses can present a considerable peril to a company’sbusiness.
“Creditinsurance protects your business against the failure of your customers to paytheir trade credit debts owed to you and their policies cover the risk oflosses caused by non-payment of buyers. It is a service that is similar tohealth insurance, except it looks after the financial health of the company itprovides coverage too”. Credit Insurance is, therefore, a financialservice that serves customers in a Business-to-Business environment. Thelearnings of Art and Science are required in managing the cash flow of abusiness. An art because it requires a thoughtful forecast with a heightenedawareness of the spending’s as well as the cost-benefit analysis of each expensemeans you will have the information, and science because it requires planningand budgeting in place that can help you achieve more sustainable growth. Froma company or from business point of view Credit Insurance can be considered Artand science for management of cash flow – As partially an art because Creditinsurance can cater the business to introduce good credit management practiceinto business and also business would be more comfortable trading withprotection against bad debts and in certain circumstances, late or non-payment;then credit insurance is worth considering. Credit insurance can give you a robustbalance sheet and (risk of bad debts is reduced).
Credit insurers have accessto more up-to-date, current and detailed information that is ready andavailable to a public. This stimulates larger credit lines or much flexiblepayment terms allowing the business to grow its successful sales. Businesseswith trade credit insurance can boost their sales by offering customers andprospects more favorable credit terms while eliminating the need for costlyletters of credit.
CreditInsurance is a partially a science in managing cash flow of the businessbecause of some of its practical and technical aspects, Trade credit insuranceprovides access to professional portfolio monitors who track client’ ability tomeet their financial obligations to the insured business, for example, settingof credit limit by insurer for the buyer to owe a maximum amount at any time.Also, Trade credit insurance alleviates/mitigates risks for businesses whosebottom line is dependent on a select number of clients. Credit insurance inmanaging cash flows of a business is thus a tool of its Risk Management policy– a potential service which can improve its financial standing. A business withcredit insurance presumably has better control over their cash flow and balancesheet resulting in a good account receivable turnover ratio and current ratio.
Frominsurer point of view credit insurance is a partial science due utilization the services of its appointed actuaryfor investment performance ,valuation of liabilities, maintaining solvencymargin ratio, designing and pricing of insurance products, creation of reservesfor outstanding claims etc.. A learning of art because it requires assessingtrade credit risk on the Buyer, giving credit limits on the Buyer and Buyercredit limit review. With expansion of economy, access to lending is becomingeasier and companies are refocused on growing, which in turns means they arefacing more competition.
In this competitive environment, companies are lookingfor credit insurers who supports them in trading safely.