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Cash flow management for businesses

Why Your Business Owning Clients Need Cash Flow Management

Apr 18th 2019
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Owners of small businesses can drive an accountant nuts. Some consider their personal and business finances asoriginating from the same wallet, forcing you to try to drum into them the need to keep those two separate. Others consider the financial side of their business like reaching into their pocket to see how much money is there, which is no way to run a company.  

As their accountant, you could offer cash flow management as an advisory service. But how?

Your business owner might see the value but doesn’t want to engage you because they think the principles are so obvious. The same logic applies to diet and exercise.You know people who work with personal trainers at the gym. The principles may be obvious, but someone has to hold their feet to the fire. Ditto cash flow management.

Regardless of industry, all businesses share three characteristics relating to cash flow management: Accounts receivable, accounts payable and the inevitable shortfalls. These shortfalls might be covered by a cash reserve, but more likely, the company has a line of credit with a local bank. Accountants can help in several ways:

  • Accounts receivable relates to money customers owe. A business owner wants to get paid as quickly as possible. If they run the local hardware store, homeowners probably pay in cash or by credit card. No problems there. General contractors likely have a house account. You as the accountant can help put systems in place to encourage those customers to pay early, such as giving a small discount for doing so. They can track delinquent payments, along with a plan for reminder messages, phone calls and, eventually, collection procedures. 
  • Accounts payable are the bills you must pay. Now we confront a paradox. Cash management involves simultaneously getting clients to pay as fast as possible while stretching out payments to people you owe for as long as possible. Many business owners will think this is the best idea ever. They’ve been doing the latter unofficially for years.  Now cash flow management means getting the best terms for long payment periods from your own suppliers. You can advise them in this area.
  • Cost control. Many businesses suffer compressed margins because clients want better pricing or prices must be cut because of aggressive competition. Meanwhile, suppliers to the business might be quietly passing along prices increases. As their accountant, you can identify their fixed costs and put services out to bid where possible.

The more pressing needs most businesses face are meeting payroll and smoothing out cash flow.

Borrowing money usually involves having a revolving line of credit from a local bank. The banking sector can be quite competitive. Although your client might have one now, they need to shop around when the business is doing well, not when they are in desperate shape.  Lenders may want collateral. They’ve seen too many companies go under. Your client likely has equipment and inventory. Now, they are talking about secured loans. This should get them better terms. This is an example where your role as a fiduciary comes into play. You can objectively help them shop because you aren’t supplying the line yourself or being paid a fee by the lender to direct business.

Earning money becomes important when they have excess cash they need to put to work. Property management companies usually have security deposits held on behalf of renters. Real estate brokers have down payments from buyers. Many others businesses have bump-ups in their cash flow. Once again, you are a fiduciary. A short-term CD or deposit account at the local bank might pay virtually nothing. You can help them shop around for safe places to put their excess cash to work at a higher return. Examples of securities with under-one-year maturities include Treasury Bills, US government agency paper, mortgage-backed securities, commercial paper, corporate bonds approaching maturity and money market funds. Certain bond funds and peer-to-peer lending may also qualify. 

Although you might be serving as the firm’s unofficial controller, you can’t stay on top of this every day. Yes, there is software out there to keep track of this stuff for business owners. They will need to know the right programs to buy or lease. Someone on their staff must be responsible for data entry. Links to their various business banking accounts will need to be integrated.

Your business-owning client should quickly see the value of cash flow management but won’t want to do the work to keep the data current. Here are two examples of technology solutions: ProfitSee offers forecasting tools addressing budgeting, cash flow forecasting and “What if” scenarios. Additionally,  Float offers cash flow management software. Business owners can see when they’ll have a surplus or a cash crunch so they can plan ahead. You can find a technology solution and help them implement it.

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