The primary concern of businesses in China, as with so many markets around the world, is protecting themselves against the ongoing impact of the pandemic in a generally challenging economic and trading environment. Now, more than ever, it is crucial to understand why investing in effective cash flow management could be a business lifesaver.
With rising interest rates, an uncertain economic future and clients knocking on the door for extended payment terms, cash flow is becoming the hottest topic in business for the foreseeable future.
However, China’s cash management environment still provides many impositions and obstacles to challenge corporate treasurers. Moreover, unwritten local customs and practices, coupled with the constantly changing written regulations, do not make the situation easier.
Cash is the most important resource for a business as it drives all business operations. Without generating enough cash and having cash on hand in due time, a business can’t function.
Cash flow management is the process of tracking your business’ cash inflows and outflows.
Cash is what powers your business and makes it function. Even when all other business components look healthy, if a company neglects its fuel levels, chances are it won’t make it to the end of the road.
In China, often complex regulations, foreign exchange (FX) controls, unique operating conditions, and developing clearing and banking infrastructures complicate the implementation of cash management techniques widely used elsewhere in the world.
Cash flow management allows you to determine the net cash position of your business, by taking into consideration information from both the balance sheet and profit and loss statement. It therefore allows for an understanding of your business’ overall sustainability, which subsequently helps to accurately inform future strategic decisions.
A common saying in China goes “cash is king.” What businesspeople refer to with this is free cash flow, which is the cash a company generates after cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the non-cash expenses of the income statement and includes spending on equipment and assets as well as changes in working capital.
Cash flow statements present the source of cash inflows and destination of cash outflows in three categories: operating, investing, and financing. This helps to determine the sustainability of the business as it illustrates whether your current cash was derived from an unsustainable source, such as a loan, or a sustainable source, such as operating activities.
Without a critical understanding of the source of cash, it is impossible to make advised strategic decisions for your business.
There are several benefits of cash flow management, such as paying expenses on time, determining the liquidity of the business and evaluating business growth.
Cash flow problems tend to be a common issue for international companies for various reasons. One of the key reasons stems from how cash is collected versus how it’s spent. If there is a huge gap between cash being collected from customers and when suppliers are paid, it could signal issues that must be rectified.
If you’re paying suppliers within 30 days but receiving cash from customers within 60 days, there is going to be a big gap. Operating costs will have to be covered until customer payments come, without leaving any breathing room to balance cash flow.
If customers seem to be slow in paying invoices while suppliers are demanding their payments, it might be time to reassess the current payment system and how to incentivize customers to pay faster, for example by letting them pay in their own currency.
Miscalculated global expansion costs can also strain cash flow. For some businesses, startup costs can end up being more than expected, or they weren’t appropriately budgeted before expansion.
For international businesses, there are added challenges of opening new entities in various regions and navigating through office space and overhead costs while adjusting to local market rates and outsourcing work as needed.
There are logistical complexities to opening new locations in other countries. In China, particularly, businesses must jump through various government hoops before they can start operating. Costs and currencies aside, companies must perform their due diligence regarding understanding the market, licensing, as well as legal, tax, and accounting considerations in the new jurisdiction.
Companies may find more reasonably priced suppliers, manufacturers or contractors in China, and their product or service might initially appear to be profitable. But quite often, most small business owners overlook the potential hefty added costs associated with payments and the time it takes for international transfers to process and clear, meaning you might not be able to access your money immediately.
If your business serves international customers, multi-currency accounts give you the flexibility of getting paid in local currencies that work for them, removing barriers to getting your invoice paid on time. Plus, it also means you’ll be able to access that money much easier and quicker than using traditional banks.
Cash flow management is an essential part of a business and often where early trouble arises. It’s a valuable part of financial health and provides oversight into whether the business can continue running as usual - especially for international businesses. If cash flow is not effectively managed, particularly operating cash flow, it becomes more difficult for businesses to continue running as normal.
A key way to ensure that cash flow is being managed is to do an analysis at regular intervals to monitor the business and its financial health.
To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at kristina@woodburnglobal.com. DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.