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82% of startups and small businesses fail due to poor cash-flow management!
Has a new business client ever come to you after a missed payroll? Turns out your vendor trust is more than just a firm handshake when your cash flow is running low.
While it is only natural for small business owners to focus on building and growing the business, it’s all too common to neglect yet another critical make-or-break factor: cash flow. More small businesses fail due to poor cash flow than any other factor. Cash flow concerns usually accumulate over time, in one form or another.
Insufficient cash flow not only hinders your client’s business growth but also makes it difficult to pay employees and vendors or to keep pace with consumer demands and stay ahead of rivals.
Top three ways cash flow issues impacted small business owners:
32% defaulted on loans
32% couldn’t pay vendors
32% couldn’t pay themselves or their employees
In spite of recognizing its importance, almost 60% of small businesses struggle with poor cash flow management and consider a lack of healthy cash flow a major challenge. Cash flow is one of the most important components for a small or mid-sized business’s success. Without it, profits are meaningless.
As an accountant, you can serve as a key resource by helping your clients adopt good cash management practices and proper tools for optimizing cash flow. This FAQ discusses ways to advise your business clients to manage and represent cash flows for their advantage.
7 Easy Ways to Manage and Represent Cash Flow for Your Business Clients
SMEs who review their cash flow only once a year have a meager 36% survival rate after five years. Those who monitor cash flow every month have a staggering 80% survival rate.
A cash flow projection every month, or preferably every week, serves as a guide to the financial well-being of the client’s business. When it comes to savvy cash flow management, easy and quick access to up-to-date information is the key. Therefore, a well-tested, efficient, automated solution will help clients manage cash flows efficiently. Choosing cloud-based cash flow software like Float, Pulse, DryRun, QuickBooks, Wave, and Insight360 gives you real-time visibility into your finances and immediate access to up-to-date, accurate information so you can track your client’s progress monthly, weekly, or even daily.
Your client’s invoicing process reveals a lot about their cash flow profile. Advise your clients to switch to e-invoicing because e-invoices are more efficient than paper-based processes. Switching to e-invoices cuts downtime by almost 70% and costs by 82%. Choosing an e-invoicing solution like Shoeboxed, Bench, Wave, Invoice Ninja, and Intuit Payment Systems, among others, in addition to following best practices in the invoicing process, will reduce errors and ensure healthy cash flows.
As accountants, you can outsource cash flow consulting to provide dedicated service, resulting in unique and timely solutions for your clients. The outsourcing partner operates as an extension of your firm and allows you to access their highly-skilled accountants for end-to-end bookkeeping services. Thus, the experts from outsourced partners can deliver higher client satisfaction with dedicated service, personalized and timely solutions. It not only helps your clients attain a positive cash flow but offers you an opportunity to grow your practice without increasing the headcount.
Mismanaged account receivables often trigger devastating cash flow shortages. When dealing with several customers, keeping track of invoices and receivables can be a major bookkeeping headache for your clients. Advise your clients to automate with customized content and to bill customers as early as possible. From having a credit policy in place to establishing ‘Days Sales Outstanding Goals’ for determining efficiency at collecting receivables, you can guide your client to use popular automated solutions like Pabbly and Wallee for timely cash collection.
You may also suggest your clients consider incentivizing customers to get paid early by offering early payment discounts, easy payment options, and deposits or milestone payments to get on solid footing. An automated, integrated solution like Quick Books, Xero, FreshBooks, SAGE, or Insight360 can help streamline account receivables efficiently.
The average payable period is the best indicator of your client’s success in managing cash outflows and significantly improving cash flow. Consider rescheduling payments to your vendors and spreading them across the month rather than clustering payments on one particular date. Consider paying an annual subscription to take advantage of discounts, which are often available with annual payments. Advise your clients to hang on to their money for as long as possible, which allows them to have more working capital at hand. Use tools like Expensify and Braintree Payments to help your business clients save time, money, and eliminate duplicate data entry.
The way your business clients get paid affects their cash flows, although payment options depend upon the client’s industry practice. To make it easier for your clients to get paid, you might suggest switching to electronic funds transfer (EFT/ACH), for recurring payments. Clients may also adopt new forms or types of payments such as mobile payments using tools like Stripe and PayPal. This facilitates speedy, more secure, and reliable payments.
Most small businesses only have enough cash on hand to support 27 days of typical outflows.
Cash reserve serves as a safety net for your clients to cover fixed expenses. Thus, it is preferable to have a cash buffer of three to six months to serve as a cushion for unexpected expenses or a downturn in the business. It is good to look back at last year’s financial records to get a ballpark figure that you must save as a buffer. Two formulas can give you a rough idea of the amount that works best for your business.
Cash Buffer = [(Current Assets – Annual Liabilities)/ 365] x No. of days you want to cover
Cash Buffer = (Monthly Inflow – Monthly Outflow) x No. of months you want to cover
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