Recently in return, the seller issues a formal invoice

Recently
U.S bank conducted a study in which, about 82% of small businesses fail due to
poor management of cash flow. But how do you know that? Mismanagement of cash
flow 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 running
and pure. 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.

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“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 supports them in trading safely.