If you have any clients who run a small business, you probably know the day they launched was one of the highlights of their careers. Yet now that their business is off the ground, one of their most pressing challenges is likely managing their cash flow.
This concern makes sense – according to FreshBooks’ 2019 Self-Employment in America Report, 35 percent of Americans considering starting their own business say one of their biggest fears is no longer getting a regular paycheck. Whether they’re faced with seasonal highs and lows, late-paying clients or delayed funding or grants, small business owners have to prepare themselves for uncertainty.
As an accountant to a small business owner, freelancer or self-employed client, you’re in the best position to advise them on how they can manage their inflows and outflows. By helping them conquer their cash flow, you can help them improve their business’ financial performance.
Here are some questions you can explore with your client to help them get more comfortable with navigating their cash flow:
1. Does your client know whether they’re in the red or the black, or if they’re truly profitable?
During a small business’s early days, they’ll often start off in the red, as their expenses are higher than their income. That could be due to startup costs, such as purchasing equipment, hiring, training, renting office space and so on. Being in the red with these types of operational expenses can be fine, as long as your client has a sense of when they’ll reach the black, when their income becomes higher than their expenses.
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However, the challenge is that many small business owners may not even know their expenses are consistently outpacing their income, month to month, quarter to quarter or even year to year. Unless they’re regularly tracking the cash in their account, how much they’re spending each month and how much they’re owed for outstanding client payments, they may not be able to accurately understand their cash flow.
As your small business client’s accountant, you can help them understand the numbers behind their income, expenses and how much they’re owed. Don’t let them wait to figure out whether they’re deeply in the red – the earlier they can understand their business’ financial health, the better their chances of long-term success.
2. Does your client have a handle on their financial reporting?
It’s key for your client to understand how their business is performing financially. One of the best ways to do this is to encourage your client to stay organized, particularly when it comes to tracking their invoices and outstanding payments and expenses.
You can help your client develop a simple system for their invoices and encourage them to follow best practices when asking their customers for payment. For example, you can advise them to have one set day for regular invoicing for ongoing project work, such as on the first or last day of the month. You can also help them set specific PO numbers for each invoice so they can easily find them for their records later.
Your client can also tackle some low hanging fruit by ensuring they get their customers to pay them on time. Getting paid on time and in full can help prevent an unexpected cash flow crunch. Having an invoicing system in place will help your client quickly get a sense of who owes them what, so they can follow up with anyone who owes them late payments.
Your client can also set fees for customers who are slow to pay or provide discounts for customers who pay early or on time. You can also encourage your client to try using an accounting solution that allows them to quickly and easily send invoices and track whether they’ve been paid.
When it comes to expenses, having processes and a system in place is also hugely beneficial, and it’ll likely save you a lot of time and headache during tax season. You can help your client develop an expense categorization system, encouraging them to file expenses in buckets like office overhead, bank fees, vehicle maintenance, gas, travel and so on. Their system should also allow them to track expenses related to projects for specific clients. All in all, it’s better than throwing all their receipts into a shoebox.
3. Do you know how you’re going to act upon the data from your financial reporting?
Once all of your client’s invoicing and expense systems are in place, you can help them run a Profit and Loss report. Having full visibility into their income and expenses will be a gamechanger for your small business client. Now, they can make data-driven decisions on whether they should adopt new strategies to grow their business, rather than relying solely upon their instincts when faced with critical choices.
For example, should they be hunting for higher value clients that are likely to give them more contracts and projects? Should they upgrade their marketing plans or invest more in local advertising? Or is word-of-mouth one of their most effective channels for revenue generation? Should they ask more of their customers to provide testimonials or referrals to new leads? Have they thought about experimenting with different pricing models, such as retainers, projects or regular contracts, to improve their business’ stability? By studying their Profit and Loss reports, their major sources of income and their expenses, your clients can explore new ways to optimize their business performance.
Understanding their cash flow isn’t something your client should leave until their year-end review or tax time. As a trusted source of advice, you can help your client regularly monitor their financials – helping them avoid a cash flow crunch and successfully grow their business.