Helping business owners manage cash flow
Ask your business clients how they know whether their business is successful, and many of them are likely to answer: “I check my bank balance.”
Indeed, cash is king when it comes to operating an enterprise, and for small companies in particular, it’s imperative to ensure enough cash is coming in to cover the cash going out on a day-to-day basis. However, many business owners are too busy running their staffs and businesses to have time to examine or appreciate the influence that working capital changes – fluctuations in current assets and current liabilities – have on the health and success of the business. As you know, a company might be generating sales but running out of cash to pay its bills on a regular basis, and that can mean trouble for its long-term viability.
Advisors who talk with clients about cash flow can uncover new engagements related to helping them forecast cash flow and manage it. In the long run, the advisors are creating a little “job security” for themselves, given that a healthy client is more likely to be one that is growing and willing to spend money on professional services. Excess cash in the business today could be cash available to spend tomorrow on financial planning, an acquisition or succession planning.
Starting the conversation about cash flow may be as simple as illustrating to the client how various levers of cash flow generation (inventory days, accounts receivable days, net profit margin, etc.) affect projected cash flow. You can easily leverage technology such as a cash flow calculator to demonstrate the effect of improving one or more key financial metrics.
Here are a few additional tips for engaging with clients about cash flow:
Ask about borrowing.
Is the client using loans for growth or just to stay in business? If the client is borrowing on a line of credit to cover cash shortfalls each month, you may be able to help them save money on interest and fees by examining the cause of the shortfalls and developing a plan to address them.
Ask about growth plans.
Companies with healthy sales growth often want to add staff or expand territory, but if receipts aren’t timely, it can lead to a cash crunch. If a client is planning to grow, help them examine the impact on cash flow and discussion options for addressing any challenges uncovered.
Ask about credit scores.
If a client isn’t proud of their credit score, it could be that poor cash flow management is contributing to late payment of bills. The owner may need help examining its own credit policies and revising as necessary to speed up collection of accounts receivable, or it may need to negotiate different payment arrangements with vendors.
Ask about their dreams.
Business owners may want to retire to the beach, but if the company isn’t generating sufficient cash, those plans may be placed on the back burner. Examining current cash flow trends and cash flow forecasts can lead to adjustments that help them reach their goals. You can help them learn more about how to forecast cash flow with this handout: Avoid Cash Flow Catastrophes.
Asking a few questions and demonstrating the impact of various actions on cash flow can be the kind of proactive advice that business clients depend on their advisors to provide.
Additional Resources
Practice Aid: Avoid Cash Flow Catastrophes
Whitepaper: How to Improve Financial Presentations to Clients
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