In a survey conducted by credit insurance provider Atradius, Asian companies reported that they might be having cash flow problems in 2014. Michael Frigo, Regional Manager for Southeast Asia, of Atradius Credit Insurance NV says Singapore recorded the highest average percentage of invoices unpaid at the due date – more than 34% of domestic and 36% of foreign invoices, the highest of all the Asia-Pacific survey participants. These late payments were most commonly attributed to liquidity constraints on the part of their customers and in the case of foreign payments, it was due to the complexity of the payment procedure. In terms of uncollectable debts, bankruptcy and failed collection attempts were cited as the most common causes of the 6% of written-off debt owed to Singapore’s businesses. To sum it up, Singapore companies are mainly worried about their cash flow due to the delay in payments which they are financing by delaying their own supplier payments in a self-perpetuating cycle
What should companies do to better manage their cash flow?
One of the tools for managing cash flow is cash flow forecasts. How does this work?
The first step in cash flow forecast is to estimate how many sales the company predicts will be coming in by referencing to previous sales history. It is also crucial to estimate when to expect payment from your sales, as well as the most accurate prediction on how much the company spends in general – including large annual expenses that only come once a year. Once a cash flow forecast is developed, the company needs to revisit and update it based on how it has been performing. Keeping abreast of your cash flow forecast will help ensure accuracy when moving forward; it can also help predict upcoming cash surpluses or shortages and help the company see an effect of an upcoming business change or decision.
Credit insurance is another protection which companies can use. Credit insurance plays a critical role in ensuring successful national and international business-to-business trade, as it covers the risk of financial loss that can occur when trade credit is offered and a bad debt occurs. The risk of a non-payment in trade business is always a possible threat– either because the customer may be unable or unwilling to pay, or because of an unforeseen event such as foreign exchange fluctuation or government intervention to name a couple. A proper credit insurance policy should be able to cover the complete range of non-payment risks in a flexible way. Not only does credit insurance provide valuable market intelligence on the financial viability of the client’s customers, but it also brings peace of mind for companies who can be assured that their trade is well-protected.
In another survey, the DSO (Days Sales Outstanding) posted by respondents in Asia-Pacific amounted to an average of 56 days. This is notably higher than the 30 days average payment term recorded in the region, reflecting the high volume of invoices that are paid late. But why is it taking longer for companies to pay? For 50.1% of the respondents in Asia-Pacific, payment delays from domestic B2B customers occur most often due to insufficient availability of fund. Meanwhile, complexity of the payment procedure is the reason most often cited by respondents in Asia-Pacific (47.8%) for payment delays by foreign B2B customers. This number is higher than 2012, which saw 45.1% of respondents stating the same reason. We don’t see this easing in the face of liquidity issues associated with global capital flows in 2014.
Are there other ways to manage cash flow aside from forecasting? Frigo says some factors that influence cash flow are actually in a company’s own hands – such as the importance to invoice customers as soon as the work is completed, making the payment methods easy for them and following up late payments quickly and regularly. Investing in technology such as online payment systems or providing cash payment discounts can really speed up a business’s cash flow.
While there are many ways to ensure cash flow stability, it is equally important to realise that it all comes down to establishing and nurturing good communication with customers, suppliers and banks. A company can also take a further step by using credit insurance, as it provides an extra layer of protection while minimising losses. If the profit margin on a sale is only around 10% of the sale receiving no payment at all because of a bad debt means a business has to go out and make the same sale 10 times just to get back even.It is vital for both small and large companies to have good knowledge of the payment practices of potential customers in countries they plan to do business with, as miscalculation may result in serious cash flow problems.
The Atradius Group provides trade credit insurance, surety and collections services worldwide in over 45 countries and has access to credit information on 100 million companies worldwide. Its products help protect companies throughout the world from payment risks associated with selling products and services on credit. www.atradius.com
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