B2B companies: the end of the cash-out headache?

Why do companies always have money outside? What are the risks?

Adequate cash flow is essential to the success and long-term survival of a company. A healthy cash position enables a company to meet its day-to-day expenses, manage the gap between cash receipts and disbursements, and meet its financial commitments when they fall due.

Chronic cash flow problems are a major cause of bankruptcy. Indeed, once a company finds itself unable to pay its expenses, difficulties tend to accumulate, sometimes reaching the point of no return: the famous vicious circle mentioned in the introduction. Some sectors, such as industry and construction, are notoriously more prone to cash flow problems than others, due to long payment deadlines and the omnipresence of bad payers.

From cash shortages to the prospect of receivership (or even liquidation), there are often only a few steps. That's why most company directors pay particular attention to their cash flow, and keep a close eye on the discrepancies between cash inflows and outflows.

However, there's nothing abnormal or pathological about such discrepancies. For example, when a company delivers goods or services to a customer, payment is not made immediately. The law therefore sets payment deadlines at 30^th day following receipt of the goods or performance of the service. This period can be extended beyond the statutory 30 days, without exceeding 60 days from the invoice date, or 45 days end of month. In France, only 58% of invoices are paid on due date This means that almost one in two invoices is paid late. Similarly, when a company settles its expenses, there is generally a delay between their registration and their actual settlement.

In addition, a company's expenses vary according to the nature of its business. For example, if the company is engaged in manufacturing, it will have to incur expenses for the supply of raw materials and spare parts to feed its production. If it is involved in retailing or distribution, it will need to build up inventories; if it provides services, it will need to pay its employees before it can invoice its customers. In addition to these sector-specific factors, there is the variable of payment times. The time lag between customer and supplier payments thus determines the company's working capital requirements, which in turn are designed to support the company's production cycle.

How do you manage this money and keep a close eye on your cash flow?

While having money "out the door" is a major concern for many managers, there are ways to optimize cash management and protect yourself from the risk of default.

Regular cash flow monitoring

Regular monitoring (for example, by keeping an up-to-date cash flow budget) is a simple but effective way of improving visibility of cash flows. This tool also enables you to identify cash flow discrepancies at an early stage, to quickly spot unpaid invoices, and to take the necessary measures.

Managing surplus cash

We know that negative cash flow entails costs for the company (agios, etc.), but poorly managed excess cash flow can also have damaging consequences. While it is possible to leave surplus cash in a company current account, there are other, more advantageous investments. Banks offer a wide range of products to enable managers to invest their surplus cash, depending on the objective they are pursuing: investing the surplus over the long term to make a profit, investing the surplus in an interest-bearing account to build up a short- to medium-term reserve, investing the surplus to finance a future investment...

Reducing payment times

Customers who don't pay on time are a threat to the company's cash flow. It is therefore in the best interests of management to reduce payment times as far as possible. To achieve this, rapid invoicing must be implemented, preferably with a payment term of 30 days.

A cash flow plan

Last but not least, a cash flow plan (also known as a cash flow budget) enables management to project short-, medium- and long-term cash flows. This forward-looking document lists all cash inflows and outflows expected by a company. It is generally drawn up for a 12-month period. To be useful to the company, the cash flow plan must be exhaustive, listing all planned operations. The aim is to provide the most reliable picture possible of the company's financial health, enabling it to implement the most appropriate measures.

What solutions are there for better cash management?

There are several solutions to help companies manage their cash flow more effectively. Here are just two examples:

Factoring

This solution is reserved for B2B activities. It is a financial management technique whereby the company assigns its receivables as soon as they are issued to a factoring (the factor ), which pays the majority of the corresponding amounts, after deduction of costs and guarantee amounts. When invoices fall due, the factoring is responsible for recovering the amount from debtors. Once the receivables have been repaid, the factor reimburses the company for the guarantee amounts. To be eligible for factoring, invoices must be certain, liquid and due. Some types of invoicing, such as maintenance services, are not suitable for factoring.

Factoring enables companies to improve their cash flow by reducing the impact of payment delays, eliminating the risk of non-payment and cutting accounts receivable management costs. It is, however, a restrictive solution, with factoring contracts committing the company for several months or even years.

Le BNPL ( Buy Now, Pay Later )

The principle behind BNPL (buy now, pay later), or deferred payment? To spread business payments over several months. Unlike conventional credit, this type of staggered financing is quick and easy to obtain. With just a few clicks, you can split up your payments. In 2020, BNPL's solutions generated $93 billion in worldwide sales, a figure that could rise to as much as $1.5 billion. 680 billion dollars by 2025. It has to be said that this type of tool offers companies a simple and effective way of better managing their payment flows. Beware, however, of commissions and late payment penalties.

What are the limits of these solutions?

As we have seen, these financing solutions have many advantages, but they are not without risk. Used wisely, they are a highly effective way for companies to better manage their cash flow. However, they must be approached with caution. Indeed, all financing solutions entail risks, which should be taken into account before they are used.

Furthermore, the use of financing tools should complement, not entirely replace, the more traditional cash management tools available to the company. Worth knowing:

• understanding the challenges of working capital requirements,

• regular cash flow monitoring,

• reducing payment times,

• anticipating "slow" periods in terms of cash flow,

• identifying superfluous items of expenditure,

• management of cash surpluses,

• choosing the "right" customers for the long term, i.e. those who pay their receivables on time.

In fact, it's important for managers not to focus on a single solution, but to look at the whole picture and analyze the various elements that make it up. Only then will they be able to control their cash flow, and the risks inherent in it.