Cash flow is king, particularly for small and medium-sized businesses. However, in the post-pandemic economy, cash flow is the most prominent of the many money challenges facing business owners.
According to a report by QuickBooks, a staggering 60% percent of small business owners say that cash flow has been a problem at their business.
CPAs need to get to grips with clients’ cash flow to become trusted advisers and help clients avoid falling into the common pitfalls of poor cash flow management.
Continue reading for a refresher on how poor cash flow can affect businesses, the causes of poor cash flow and pointers on how to help your clients improve their cash flow.
Poor cash flow affects every aspect of a business and, if not brought under control quickly, can lead to devastating consequences.
- Stymied growth. Businesses will struggle to scale their company without the funds to support them. For instance, they wouldn’t be able to hire new staff, rent new office spaces or expand their offering, which would stifle progress. In turn, it can affect employee morale and put off investors
- Breakdown in supplier relationships. Being constantly late in paying suppliers due to poor cash flow can cause tension in the relationship. This could result in poor service or a permanent rupture in the relationship.
- Stress. Not only does poor cash flow affect the business, but it can also have a direct impact on clients’ health. Stress, depression and anxiety are all common side effects of money worries.
- Solvency. The unfortunate truth is that if businesses are continuously stifled with poor cash flow, it can result in them having to close for good.
To prevent your clients from struggling with poor cash flow, it’s critical to keep an eye out for potential cash flow gaps and pass this information on to clients.
Although there are many signs that may indicate cash flow problems are looming, here are some of the most common:
- Invoices are stacking up. Research by the banking platform Tide showed that UK SMEs are “crippled” by late payments with businesses chasing more than £50 billion worth of invoices, according to a survey of 1,000 CEOs, founders, directors and senior management at SMEs. If customers aren’t paying on time, it can quickly spiral and lead to more serious cash flow problems for the business.
- Expenses are increasing. You only need to turn on the news to know that prices are going up. When companies are hit with a surge of increased prices at once, such as rent, energy, supplies, cash flow problems are likely to materialise if not managed correctly.
- Sales are slowing. Dips in sales are bound to happen, whether it’s because of the economy or a seasonal lull. Whatever the case may be, when sales slow down, cash stops flowing and can become a serious issue for businesses.
- Short-term debt. When excessive short-term debt builds up (e.g., from credit cards), it can be tricky to get it under control again without it strangling cash flow.
Accountants play a leading role in helping clients improve their cash flow, keeping them out of financial difficulties and ensuring they make smart financial decisions. Here are some ways CPAs can help keep cash flow problems at bay for clients.
1. Build Strategies for Immediate Invoice Payment
The faster and more frequently your client’s customers pay, the better their current cash flow position will become — which is why helping clients get paid on time can be a real gamechanger. But breaking the late payment cycle isn’t always easy.
Although you can’t make their customers pay, you can help clients better manage late payments by creating a strategy to ensure that late payments don’t become an ongoing nuisance for the business.
Consider advising your clients to use automatic invoicing tools to reduce the time between sales being made and invoices being sent. Some automated tools also chase up unpaid invoices on the client’s behalf to reduce the time spent on this time-intensive and stressful task. If the client doesn’t want to take a digital approach, CPAs could provide clients with email templates to help them secure quicker payment.
2. Create In-depth Cash Flow Forecasts
The better you understand your clients’ cash flow, the more you’ll be able to spot potential issues down the road.
Consider using a cloud-based cash flow solution to gain real-time insights into your clients’ spending. Updated figures will help you offer proactive advice to your clients. Moreover, they will feed your forecasts for a more realistic future view of clients’ cash flow.
With data-driven insights, your clients will be in a better position to manage upcoming expenses and make business decisions for improved cash flow.
3. Review Pricing
To help clients improve their cash flow position, it’s essential to review the way they generate income.
Work with your clients to:
- Review their pricing model to ensure prices remain competitive while generating enough of a profit margin to maintain cash flow and healthy profits.
- Identify cost savings by reducing operational costs or reviewing the size of the product range.
Experiment with pricing strategies to find out if there are products that customers are willing to pay more for.
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