8 min read
1 Dec 2021
8 min read
1 Dec 2021
Cash flow, or the flow of money into and out of a business, is a central element of operational health. It determines a business’s ability to pay bills on time, cover unexpected costs, and invest in growth or development – all essential components of a thriving company. But there are a range of cash flow risks that can affect the health of a business’s books, and in turn the amount of available working capital.
Poor cash flow management can expose you to these risks, which is why it’s one of the most common causes behind businesses failing. That makes understanding cash flow risks critical, ensuring you stay in control of your cash flow and avoid it controlling you.
Cash flow is sometimes mistaken as simply being the same as revenue or profit, but it’s actually more of a process than a single figure. Essentially, cash flow is the term used to describe the flow of money into and out of a business in all its forms. Money in can come from revenue, investments, and other operating activities, while money out is the total of all a business’s expenses.
Cash flow is often described as ‘positive’ or ‘negative’, which describes whether more money is flowing into or out of a business in a given time period. If a business is making more money than it is spending, it is cash flow positive. If the opposite is true, it is cash flow negative. Generally, running a negative cash flow poses greater risks, as it highly limits the flexibility with which you can react to adversity, whether from within your organization or in the wider market.
There are several commonly used terms that apply to cash flow risk, which it’s helpful to understand. They are:
There are a wide range of cash flow risks to be aware of, posed by a variety of sources. Some cash flow risks are internal, which are generally able to be controlled by operational policy, while others are external and largely out of the control of the business at risk.
The main categories of cash flow risk are:
With an understanding of what types of cash flow risk exist, and what kind of threat they pose to your ability to operate healthily or efficiently, we can finally move on to covering how you can go about managing them. These are four of the best methods to consider when you’re trying to minimize cash flow risk.
Cash flow forecasting is a hugely beneficial tool in the battle against cash flow risks. With effective cash flow forecasting software, you can get an accurate prediction of cash flow over extended periods of time, helping you to make better decisions and plan ahead for periods where you predict surplus cash or funding gaps.
Instead of relying purely on external financing to deal with the fallout of cash flow risks, it’s also helpful to create a plan as to how you can access liquidity from within your supply chain. This can be achieved with solutions like dynamic discounting and supply chain finance, which help to speed up cash flow and unlock working capital.
From a more traditional perspective, you can also help to mitigate cash flow risks by optimizing how money comes into your business. This can include techniques like offering an expanded choice of payment methods, following up quickly on invoices, and working on improving operational margins.
Finally, you can also minimize the money that flows out of your business by reducing expenses where appropriate, helping to improve margins without increasing sales. This can be achieved in a broad range of ways, including converting short-term debt to long-term debt, eliminating unnecessary expenses, and renegotiating supplier terms.
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