Home Accounting and Auditing How to improve your firm’s cash flow

How to improve your firm’s cash flow

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If you find yourself sometimes struggling to keep cash flowing smoothly at your firm, rest assured you are far from alone, reports Accountingweb. Most firms (especially those with an emphasis on tax deadlines) can find that the quieter parts of the year can be the most challenging.

The majority of advice out there is fairly obvious. Accounting professionals are told to focus on managing collections, controlling costs, and automating client payments. But could this just be treating the symptoms and not the cause.

This guide, from cash flow expert Mike Milan, takes a deep and fundamental look at the root cause of cash flow challenges: your relationships with your clients.

In it, he discusses crucial points to consider, including:

  • How your clients perceive you and the services you provide, and how that impacts their payment priorities
  • How to attract and engage clients in a different way that changes those priorities
  • How to nurture a client base that pays on time, every time

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From the whitepaper:

It’s no surprise that many accounting practices struggle with cash flow. This is iron­ic, because as a small business owner, we expect our accountant, bookkeeper, or CPA to be the expert in mastering the art of cash flow management. What is some­times forgotten is that our accountant is a small business owner as well, with a lot of the same problems that we face.

This guide would be an easy read if I just said that they have problems with invoic­ing, collections, and expense control, but there are other issues in play that deserve your attention. Cash flow is dynamic in an accounting firm and can be as chaotic as it is predictable. Many firms have extreme seasonality centered on the tax dead­lines. How do you smooth out the effects of seasonality so you aren’t worried about surviving through the slower months? Better yet, how do you thrive all year long?

Another problem similar to the issues small business owners struggle with is not starting with the end in mind. Many accountants are too busy working on their cli­ents’ businesses and don’t give their own the same time and effort. They think that the payoff is when they sell or exit the firm in retirement.

Here’s the thing: There is an active market for your firm, but with the Baby Boom­ers looking for ways to retire, the market may be pretty competitive. You also might not like the value of your firm. Accounting practices tend to be about 1 times gross revenues with their valuations. Therefore, if you want to your firm to be worth more, you have to grow.

About 70% of firms currently produce less than $200,000 per year in annual rev­enues, with profits between $65,000 and $80,000. So, the value of your firm might be $200,000 or very similar to just having a job for a year or two. Therefore, the dream of funding your retirement by selling your practice isn’t very likely. In fact, you need to think of selling your practice as just running the last mile of a marathon. In other words, you must put in the work every day to finish with the amount of money you need to retire. The two most basic ways to grow are get new clients or get more from your current ones.

With that in mind, let’s assume you know the most common ways you can improve cash flow in your business. Here’s a couple as a review:

  1. Invoice promptly and correctly
  2. Manage collections actively to reduce money owed and bad debt
  3. Control overhead costs in relationship with sales fluctuations
  4. Keep enough cash on hand (minimum of 45 days of operating expenses)

Getting new clients makes sense if you don’t have very many, but if you do, why not increase the amount of money from your current client base? To do this, you have to examine the client experience at your firm. This guide will help you evaluate the steps needed to provide and receive the most value you can from each client. It starts with understanding the Stages of the Client Journey.