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Cash flow: What CEOs Need to Know?

A CEO is like a banker: our money is in the bank account, and open sales invoices have the risk of not being paid in time. Strict cash flow risk management can significantly improve our cash flow to fuel our growth and decrease external funding reliance. So before you talk with banks or alternative lenders, ensure you've done everything on your cash flow. Optimal cash does not mean having a big cash buffer in a bank account; a cash buffer generates costs. Costs can be funding fees due to loans we've taken or opportunity costs due to investments we've not made.

Optimal cash means we only have a small proportion in our bank account and invest excess money in our business to grow faster. CEOs typically need to keep cash buffers in a bank account for safety because we aren't confident about future cash flow. Having confidence about cash forecast with riskrate, you can grow to have small cash buffers in a bank account. Only a tiny amount of our money is in the bank account (or should be). Most of our cash flow is in the Customers' bank accounts until they pay the sales invoice. The longer the payment time, the higher the funding costs because we need to use invoice finance, a loan, or a cash limit to cover the funding need.

Payment times, interest-free funding to your customer

Optimizing your cash flow can be done in two ways: minimizing late payments and shortening payment terms. Let riskrate help you identify opportunities to get better cash. Before a deal with the Customer, quickly check the payment terms and delays using riskrate automation. If there is a difference in the payment times, cash problems arise both in sound and hard times. Speeding up the cash flow during strong growth is essential due to high burn. During the steady growth, the dynamics of payment times leave more money for investments or the repayment of loans. And during the downturn, cash is king.

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

Build your cash flow 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 upfront revenue, and pay only behind income. The longer the payment terms you can negotiate with your supplier, the better.

The cash limit is a buffer for daily changes. The cash limit is a buffer for daily changes. Your total funding costs are a sign-up fee and a credit provision added by a margin for those days with a negative cash balance. Do your homework, and make the comparison on an annual basis. Factoring and invoice finance is the funding against your open sales invoices Factoring and invoice finance is the funding against your open sales invoices. It is external funding, so your costs depend on your financials, credit rating, the number of sales invoices funded, and the payment terms with your Customer. Do your homework, and make the comparison on an annual basis. Check who takes the risk if your Customer does not pay the invoice. Keep customer payment times, factoring limit, and cash forecast in check using riskrate. riskrate understands your factoring rules.

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 bookkeeping. Smooth invoice processing reduces alternative costs on your accounting. Cash Pool for mid-size companies 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 several legal entities. Cash Pool gives access to group liquidity through a real-time, cross-border, multi-currency structure. A cash Pool is a strategic choice approved by a board, and once built up, it takes work to break down.

It starts with defining your Cash Management structure. After that, you'll set meetings with the key 3–4 relevant banks and send the proposals request. 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, etc. Your bank accounts and fees will are centralized in the selected cash pool bank.

Cash pool means that you'll set up a new external cash pool account that each legal entity can access. You can have it as a single currency, like EUR or USD, or a multi-currency, and have a cash limit. It's still possible to make payments in all bank accounts. Accurate daily balance and cash forecast You may have seen monthly cash forecasts using monthly bookkeeping balances on P&L and Balance Sheets. It's good to keep in mind that this is a helicopter view. This is done for long-term business planning, thus, not predicting your cash forecast, cash position, late payments, or how to optimize it.

  1. When you see it, it is at least one month old.

  2. It is a monthly plan using stale data on bookkeeping. Bookkeeping uses accruals and bookkeeping entries. Cash forecast using bookkeeping data handles cash balance as a balance sheet item: the cash balance is used as a batch to equalize numbers.

  3. Your account receivables have a payment risk due to late payments. This has a significant impact on your future cash flow and funding. This is not visible when using bookkeeping reports.

As a result, we need to keep extra cash buffers in a bank account, holding back our growth.

Cash forecast means the daily cash flow for the following, for example, 90 days. It uses live data from banks and invoices. Use riskrate to predict your cash forecast with confidence.

The environment is changing rapidly right now. If you need to make better decisions faster, we'd love to serve you - quickly.

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