What is Cash Flow Management?

What is Cash Flow Management?
By alphacardprocess December 31, 2021

Businesses that do not manage cash flow can run into serious financial problems. This is especially true for businesses that offer credit to their customers, as they must wait until their clients have paid the invoices generated by these transactions before receiving any money themselves. Generally managing your company’s cash flow means keeping enough money in the bank to pay your daily expenses and staff salaries, as well as having some emergency cash on hand in case of unexpected costs.

Businesses that sell their products usually rely upon accounts receivable (A/R) financing to manage cash flow. With A/R financing companies are able to purchase invoices from the clients they have provided goods or services for.

The two major players in the A/R financing industry are Factors Chain International, Ltd. (Factors Chain), and Commerce Capital Corporation (CCAP). Both companies provide businesses with A/R financing by purchasing invoices from their clients at a discounted price, and then collecting 100% of the value of these invoices from their clients. The client is able to get its money earlier than it would otherwise, while the business itself benefits from having liquid assets to cover expenses without having to wait for customers to pay their invoices.

Factors Chain offers an A/R program that has no fees, unlike CCAP which charges a fee for this service. There are also no minimum credit score requirements, unlike CCAP which requires a score of 650. Factors Chain loans are also paid out in shorter timeframes than those provided by CCAP. Where clients would have to wait 30-45 days for repayment when using the services of CCAP, this timeframe is decreased by up to 10 days in the case of Factors Chain.

Both of these A/R financing companies are able to finance invoice values up to $15,000. There is no set minimum or maximum number of invoices that can be financed (provided that you meet the credit requirements). Factors Chain also offers business clients an A/R program that covers transactions conducted via mobile devices like Smartphones and tablets. This is a significant advantage over CCAP, which only provides A/R financing on transactions carried out on computers.

There are various ways in which businesses can use A/R financing to manage cash flow. For example, it could be used to cover expenses such as business taxes or loan payments that need to be made on a regular basis every month. This allows businesses to avoid having to withdraw money from their day-to-day business accounts, which can result in less cash being available for new expenses and thus negatively impact the company’s cash flow. A/R financing could also be used at times when there is a need for an additional amount of cash (for example: during the holidays, when there are more expenses).

A/R financing can also be used to cover expenses that are unexpected or unusual, such as costs generated by an accident, natural disaster, equipment failure, etc. This ensures that the company is able to continue operations without being disrupted.

Using A/R financing in order to manage cash flow makes it possible for businesses to avoid having to make money management decisions based on unpredictable cash flow. This can be achieved by implementing strategies such as investing in short-term investments (e.g., US Treasury Bills). However, this solution may or may not be appropriate depending on the financial standing of a business and its specific needs.

A/R financing is also used in conjunction with other cash flow management strategies. For example, a company may decide to have invoices older than 30 days automatically sent to A/R financing companies when it falls below its ideal liquidity position (this is also known as the “avalanche” method, which refers to sending out invoices in waves).

The risk associated with A/R financing is the fact that when a business defaults on payments, it is exposed to additional costs related to collection. This can result in late fees and negatively impact your company’s credit score. In addition, if you fail to repay A/R invoices within agreed-upon terms (e.g., 30 days), you will likely have to pay a penalty, which can include an interest rate hike.

In order to avoid these risks, it is very important that you only use A/R financing as a tool once other cash flow management strategies have been seriously explored and implemented. In addition, if you do decide to use this service, make sure that your invoices contain proper payment terms, so you are able to repay A/R financing providers within the agreed-upon timeframe.

As you can see, there are various cash flow management strategies that businesses can implement. You should be sure to weigh all of your options before making a decision on how best to use A/R invoicing for your company. If you require additional information or would like to know about other types of financing and their associated pros and cons, you should consult a financial advisor.