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Credit insurance - an art and science of managing cash flow

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According to a recent study by U.S Bank, about 82% of small businesses fail due to poor mismanagement of cash flow. But how do you know that? Cash flow mismanagement occurs if your expenses exceed your cash. Without positive cash flow, a company cannot meet its operating and financial obligations. Thus cash is a lifeblood of the business it must be pure and running. Most often cash in a business comes through investing activities and through customers. Many a time’s customers are unable to pay for products and services they buy due to some constraint and in return, the seller issues a formal invoice also known as Trade receivable.

Trade receivable means outstanding invoices of a company or the money, the company has, which is unsettled from its customers. In a company’s balance sheet, trade receivable is often recorded as an asset because there is a legal obligation for the customer to return cash for the debt. Accounts receivable are often a business largest asset. If your customers are unable to pay what they owe, potential credit losses can present a considerable peril to a company’s business.

“Credit insurance protects your business against the failure of your customers to pay their trade credit debts owed to you and their policies cover the risk of losses caused by non-payment of buyers. It is a service that is similar to health insurance, except it looks after the financial health of the company it provides coverage too”. Credit Insurance is, therefore, a financial service that serves customers in a Business-to-Business environment.

The learnings of Art and Science are required in managing the cash flow of a business. An art because it requires a thoughtful forecast with a heightened awareness of the spending’s as well as the cost-benefit analysis of each expense means you will have the information, and science because it requires planning and budgeting in place that can help you achieve more sustainable growth.

From a company or from business point of view Credit Insurance can be considered Art and science for management of cash flow – As partially an art because Credit insurance can cater the business to introduce good credit management practice into business and also business would be more comfortable trading with protection against bad debts and in certain circumstances, late or non-payment; then credit insurance is worth considering. Credit insurance can give you a robust balance sheet and (risk of bad debts is reduced). Credit insurers have access to more up-to-date, current and detailed information that is ready and available to a public. This stimulates larger credit lines or much flexible payment terms allowing the business to grow its successful sales. Businesses with trade credit insurance can boost their sales by offering customers and prospects more favorable credit terms while eliminating the need for costly letters of credit.

Credit Insurance is a partially a science in managing cash flow of the business because of some of its practical and technical aspects, Trade credit insurance provides access to professional portfolio monitors who track client” ability to meet their financial obligations to the insured business, for example, setting of credit limit by insurer for the buyer to owe a maximum amount at any time. Also, Trade credit insurance alleviates/mitigates risks for businesses whose bottom line is dependent on a select number of clients. Credit insurance in managing 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 with credit insurance presumably has better control over their cash flow and balance sheet resulting in a good account receivable turnover ratio and current ratio.

From insurer point of view credit insurance is a partial science due utilization the services of its appointed actuary for investment performance,valuation of liabilities, maintaining solvency margin ratio, designing and pricing of insurance products, creation of reserves for outstanding claims etc.. A learning of art because it requires assessing trade credit risk on the Buyer, giving credit limits on the Buyer and Buyer credit limit review. With expansion of economy, access to lending is becoming easier and companies are refocused on growing, which in turns means they are facing more competition. In this competitive environment, companies are looking for credit insurers who support them in trading safely.

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