A Simple Checklist for Controlling Finance Costs

Central Banks began rising interests rate to increase borrowing costs, slow demand and eventually tame inflation.

Higher interest rates don’t impact all companies the same way.

A strict cash planning can have a significant effect on your external funding need: funding costs of the long-term loan is always higher than funding costs of the short-term loan. Before the long-term loans, make sure that all is done on your Cash and Money Flow. The organic cashflow is the most important and the most cost-efficient funding source.

A Cash forecast is a very valuable paper during your funding negotiations. It’s good to split your funding need for the short term need (less than 12 months) and the long term need (more than 12 months). Use riskrate to plan your funding need with ease..

A simple checklist for Controlling short-term funding costs

1. Customer payment times: your funding to your Customer Only a small amount of our money is in the bank account. Most of our money is in the Customers’s bank account until they pay the sales invoice. The longer the payment time, the higher the funding costs because we need to use an invoice finance, a loan or a cash limit to cover the funding need. Use riskrate to know your daily funding cost with ease.

So the rule number one is to focus on the sales invoices. Speeding up your money flow can be done in two ways: by minimising the late payments and by shortening the payment terms.

riskrate can predict your customer late payments: before a deal with the new customer, check the predicted payment time using riskrate automation with ease. No manual work is required. You also can compare to others in the industry in terms of your payment times. . Predict customer payment times with ease, bring it to a Power BI using riskrate automation.

2. Better Cashflow: Keep Customer payment times shorter than Supplier payment times

If there is a difference in the payment times, cash problems are arising both in good and hard times. During the strong growth, speeding up the money flow is important due to high burn. During the steady growth, the dynamics of payment times leave more money to investments or the repayment of loans. And during the downturn, cash is king.

Use a very simple rule of thumb: keep sales invoice payment time (DSO) shorter than purchase invoice payment time (DPO). Use riskrate to follow up your daily DSO and DPO.

Not always possible, but build your engine on advance payments or short payment terms. Make sure you are invoicing promptly. On the cost side, keep your burn-rate in control. Don’t spend up front of revenue, spend only behind revenue. The longer payment terms you can negotiate with your supplier, the better.

3. Cash limit is a buffer against changes in the daily cash balance

Cash limit is a buffer for daily changes. Your total funding costs incurred are a sign-up fee and a credit provision added by a margin for those days of a negative cash balance. Do your homework, compare and calculate interest fees and funding costs on an annual basis. Add your cash limit on top of your riskrate daily cash forecast and bring it to a Power BI.

4. Invoice finance and factoring: compare and calculate interest fees on an annual basis

Factoring and invoice finance is the funding against your open sales invoices. It is an external funding so your costs incurred are depending on your financials, your credit rating, the number of sales invoices funded and the payment terms with your customer. Do your homework, compare and calculate interest fees and funding costs on an annual basis. Check who has the responsibility if your customer does not pay the invoice.

Fluent invoice finance -reporting make your life easy. It’s good to go through the invoice processing, when you’ll get the money, how you’ll get your reports and how it can support your book-keeping. Smooth invoice processing reduces alternative costs on your accounting.

5. Cash Pool: do your homework on payment volumes

The treasuries in the large companies have set up multi-currency or EUR Cash Pools and it’s a relevant opportunity also for a mid-size company to consider if your cash is around of several legal entities. Cash Pool gives an access to group liquidity through a real-time, cross-border, multi-currency structure. Cash Pool is a strategic choice approved by a board and once build up, it’s not easy to break down.

It starts on defining your Cash Management structure. After that, you’ll set meetings with the key 3–4 relevant banks and send the request of proposals. Collect data using riskrate and bring your volumes to an excel: incoming and outgoing payments like SEPA payments, cross-border payments, salaries, reference payments, credit limits and so on. This is because your bank accounts and payments will be centralised in the selected cash pool bank.

Connect all your banks to a Power BI using riskrate automation.

Cash pool means that you'll set up a new external cash pool account that each of your legal entities get access to use. You can have it as a single currency, like EUR or USD or a multi-currency, and have a cash limit on top of all. It’s still possible to make payments in all bank accounts. The environment is changing rapidly right now. If you need to make better decisions faster, we’d love to serve you - fast.

Know Your Money Flow.

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