CREDIT INSURANCE – AN ART AND SCIENCE OF MANAGING CASH FLOW
Trade receivable means outstanding invoices a company has or the money the company is unsettled from its customers/clients. A company’s balance sheet, accounts receivable is often recorded as an asset, because there is a legal obligation for the customer to remit 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. Credit insurance protect 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 to. 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 cash flow of a business, both experience and intuition comes into play while managing and projecting cash flow of the business and cash flow management can be a pretty practical process as all the numbers have to be entered and tabulated and assessed. Many business owners use either weekly or monthly cash-flow projections to help manage short-term cash needs along with annual projections to develop longer-term capital strategies.
From a company or trade or from business point of view Credit Insurance can be considered 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 stronger balance sheet and (because the risk of bad debts is reduced). Credit insurers have access to more up-to-date, current and detailed information than is readily and available to a public. This stimulate larger credit lines or much flexible payment terms allowing the business to grow its profitable sales.
Credit Insurance is a partially a science in managing cash flow of the business because of some of its practical 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 have better control over their cash flow and balance sheet resulting to a good accounts 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 to assess 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 finding value in a credit insurer that supports them in trading safely.