Businesses must remain solvent or else the enterprises fold. This is a simple truism that runs across all manner of different industries. Maintaining good financial footing is not easy for every company since ups and downs are unavoidable in the business world. Exploring strategies, proven strategies, to maintain good financial footing is a must. One such process many companies employ is cash flow matching, a hedging strategy designed to reduce the impact of an unpredictable market.
Stating that cash flow matching is a form of “paying bills” might be simplistic, but the description is not far removed from reality. The idea behind cash flow matching is to put money into an investment vehicle for the purpose of paying off some sort of liability in the future. Depending on where the money is invested, the process could be either a stable or a risky one.
Businesses do need to pay obligations or access cash flow for a variety of reasons. Keeping money in a reserve account helps with this process. Low-interest accounts, however, do not provide a dynamic means in which to cover obligations when future cash flow is limited. Interest-bearing accounts might be needed to address the situation.
The CD Strategy
Businesses do need insurance coverage in order to be protected from losses related to liabilities. An umbrella policy could provide millions of dollars in coverage for a business worried about dealing with a litigious public. An umbrella policy may cost $250 per year.
Investing $20,000 into a certificate of deposit (CD) at 1.2% interest will yield $240 at the end of the year. Only $10 is left to pay the balance on the insurance policy.
In essence, the interest covers the cost. The cost does not come out of the pocket of the business. This is a very basic example, but one that illustrative of how cash flow matching can be performed.
Riskier Portfolio Endeavors
More complicated cash flow matching strategies can be put into operation. Investing in stocks and mutual funds could pay out far more if the rate of return is tremendous. Obviously, stocks and mutual funds come with far greater risks that certificate of deposit or government-issued bonds. Business owners do need to think very carefully about any investment vehicle they opt to put funds into when hoping to engage in cash flow matching.
The Insurance Industry
The insurance industry presents a brilliant example of how cash flow management works. In the insurance world, premiums are paid and settlements are made. An insurance company has to take in more than it pays out in order to remain solvent. One way to boost solvency is to invest money into reliable investment vehicles. The increased value of the money aids in dealing with settlement payouts.
Speaking with a Financial Advisor
Jumping head first into a cash flow matching strategy might not be the best move. Instead, discussing the approach with a skilled financial advisor may be the better plan. Doing so could improve the chances the strategy works.