How do you manage cash flow on lending platforms?

Cash cycles are typically measured in days. A shorter cash cycle is better than a longer cash cycle. Any company with a shorter cash cycle has more working capital and less cash tied up in inventory and receivable accounts, which means it is less dependent on borrowed money. Cash cycle depends largely on operational efficiency. Factors that effect the cash cycle include labor efficiency, the quality of raw materials, quality of equipment, efficiency of management structures for processing materials, economic and market influencers, and more.

Actually I disagree with the idea of a shorter cash cycle by giving short term loans. This is because cash flow is really about volume and not how long it takes to come back. The business should always focus on higher volume inflow and lower volume outflow to ensure a positive net effect at every point in time. Attention should be paid to payments. Businesses should make sure that its collection policy is shaped based on its payments commitment. Payments commitment may be out of control of the business but the business can and should have greater control on its collection. For instance, if a client advisors come to me to request for claim for clients, I present such client advisor with list of receivables from his other clients to pursue

Lending be it an in-house bank, fintech or a commercial bank introduces a different level of liquidity risk in the cash cycle. Firstly you need to understand sources, nature, tenure and cost of your deposits. Generally a lending entity takes deposits be it publicly or privately and these deposits come at a cost, hence failure to utilize them will result in huge losses. Deposits are usually short-term while loans are medium to long-term, which creates a huge mismatch in the cash flow cycle. I would charge higher fees on long-term loans because they are risk while charging lower fees on short term loans because they are liquid. I will then offer higher interest rates on long-term deposits than short term which will improve liquidity.

Consider "Lloyds Stationery" it generates $15,000 in monthly sales. Expenses: COGS: $5000 per month Rent $1,000 per month, Salaries: $2,000 per month Utilities: $750, Advertising: $250, Loan $500, Cash Flow Analysis: Total Monthly Revenue: $15,000 Total Monthly Expenses: $9,500 Monthly Cash Flow: $5,500 In this perspective, Lloyds has a positive cash flow of $5,500 per month. This indicates business is profitable. Understanding cash flow helps Lloyds make decisions about inventory, staffing, marketing, and growth strategies. Understanding and monitoring cash flow is essential for financial stability and growth. It enables informed decision-making, helps identify potential financial issues, and supports the achievement of financial goals.

Cash flow forecast starts by choosing a forecasting period and note how much cash you have at the beginning of that period. List and date all your expected cash income for the forecast period, including sales receipts and things like grants, tax refunds, or incoming finance that will hit your bank. List and date your outgoings, too. Besides familiar business costs, be sure to capture less regular things like annual fees or taxes that might come due, or repairs that need to be performed during the period. Take your starting balance and run through the forecasting period, adding incoming amounts and subtracting outgoing amounts. This will show how much cash you will have at any given point in time.

Forecasting cash flow is a dynamic process that requires regular monitoring and adjustment. It's a valuable tool for making informed financial decisions. It involves estimating future cash inflows and outflows to ensure there's enough liquidity to cover expenses, repay debts, invest, and meet financial goals. Following steps involved in Cash flow forecast: A) Collect historical data B) Identify Cash inflow C) Estimate / anticipate Cash outflow D) Forecast Sales Revenue E)Adjust timing of cash outflow F) Predict Cash flow Projection G) Account Seasonal variations H) Provide contingencies I)Scenario Analysis J) Use tools for analysis.

Cash flow optimization is essential in 2023 given the market downturn and less cash funds from investors. Now, All the CFOs should focus on main four points when it comes to CF optimization 1. Data Gathering, CFOs must first build a 13-week cash flow model for a complete picture of the organization’s cash inflows and outflows. 2. Cost reduction. Strategically reducing costs comes down to optimizing overhead and reducing direct costs and can include everything from sales and marketing overhead, payroll cost, materials cost 3. Revenue and margin enhancement. Enhancing revenue, opportunities for incremental revenue and competitive outlook 4.Working capital optimization. Management of inventory, capital expenditure, (AR/AP), credit terms.

Lloyds has small pencil mft unit it had been facing cash flow challenges due to irregular revenue streams and high costs. Challenges: a) High Fixed Costs, associated with rent and overheads b) Irregular Sales due to its seasonal demands c) Non availability of loan d) Slow-Paying Customers & long receivable days. Optimization: a) Negotiated extended payment terms with key suppliers b) optimized inventory by closely monitoring stock levels and reducing excess inventory.c) Implemented stricter credit policies on receivables d) Diversified product lines to cover up seasonality e) Renegotiating the lease for a smaller office space and optimizing expenses. Result :Cash flow stability, Faster receivables, Revenue growth. Positive cashflow

Employing efficient cash flow management strategies will not only make the business survive but in most cases turn it into sustainable profitability. Treasurers who have focused on profitability while ignoring liquidity and cash flow forecasting have faced insolvency and eventually liquidation. Stress testing, ratio analysis, simulation, cash flow matching and scenario analysis strategies must be employed to manage liquidity. Employing these strategies will enable the business to survive even in a difficult operating environment.

As a lending banker my experience is for small businesses, cash flow management is more important than profitability. Have seen even profitable small businesses going belly up for want of liquidity. Unlike large businesses, they don't have deep pockets or support system; which makes them more vulnerable. Had also witnessed a few cases where profitable small businesses were forced to go out of business through cash squeeze from debtors and creditors.

Understanding the business' operational cycles and best practices prevailing in the markets help to improve your cash flow skills. Fintech/ lending industry is one the rapidly growing sectors across the globe. This growth has resulted in many researches and development of better practices. You can grab this knowledge through various online and offline platforms. Keeping yourself updated with these trends, knowledge and skills is pivotal in successful cash flow management.