7 Tips for Cash-Flow Risk Management

Business-sector companies are inherently exposed to financial risks, including foreign exchange fluctuations, changes in commodities prices, and changes in interest rates and price indices. Investors, customers, suppliers and regulators raise the required level of transparency in the assessment and disclosure of the company’s financial and operational risks. The company’s risk management requires a systematic methodology.

We chose 7 cash-flow risk management tips for you:

• Maintain a cash buffer – verify that you have a liquid and sufficient cash buffer, that would enable you to handle an increase in your average collection period and a reduction of your credit facilities.
• Reduce you dependency on stakeholders – a wide as possible dispersion of customers, suppliers and lenders would reduce your reliance on the capability and willingness of such stakeholders to continue and work with the business under similar commercial terms.
• Non-aggressive investment policy – your investment plan review should be conducted as to maintain your solvency even in a case where your investment plan generates no returns; the business must try and match, as much as possible, the durations of the assets with those of the liabilities – funding your investment plan with available cash may create a liquidity problem due to usage of liquid sources to fund assets that generate cash within periods of more than one year.
• Credit policy management – manage your credit risks throughout the entire credit period, until your meeting with the money. Your credit policy must include an additional component that reflects the certainty level: when reviewing the credit extension policy in high uncertainty conditions, the right thing to do would be to reduce your risk appetite, even if this means that you skip a transaction. On the other hand, in cases of high certainty, it would be appropriate to price the credit risk and include commercial terms that match the transaction’s risk level.
• Collection – The implementation of systematic collection processes, which include continuous conclusion making after each interaction with the customer, would enable you to prepare for a situation of late payments.
• Calculated risk-taking – take only manageable risks. A calculated risk is a risk which materialization won’t lead to severe liquidity problems.
• Stress Scenario Contingency Plan– build a contingency plan for stress scenarios, such as high-cash-flow-impact, low probability events. Such plans can include, for example, maintenance of unwithdrawn signed credit facilities, marketable assets and better commercial terms with customers and suppliers.

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