Knowing a range of ways to improve cash flow is essential rather than simply relying on your accounting firm clients to pay you on time. It's not always possible to instantly take on more clients, and late payments can become problematic for cash flow. Luckily there are other methods of improving your clients' trust and your cash flow that you can adopt to help alleviate the situation quickly.
This article covers the impact cash flow problems can have on your accounting practice, how to avoid them, and 8 ways accountants can improve their cash flow.
The impact cash flow problems can have
Unfortunately, cash flow problems can be among the earliest signs of failure in accounting practices. That's why it's vital to understand how to solve cash flow problems quickly and before the situation gets out of hand. A negative cash flow can impact an accounting practice in various ways.
Slow growth
If you're not meeting your forecasts, achieving longer-term practice growth targets soon becomes impossible. You will also see a knock-on effect on other pipeline plans to support growth, such as scaling up your accounting practice staff, updating accounting practice management software, or upgrading premises. Cash flow problems must be dealt with quickly to avoid derailing longer-term plans for your accounting practice.
Stretching out your payment terms
Delaying paying your suppliers might feel like a short-term fix, but in reality, it can damage your business relationships and create a snowball effect on your accounting practice. Not paying your suppliers on time will very quickly damage your accounting practice reputation and your brand.
Not being able to pay staff on time.
If negative or poor cash flow becomes more sustained, accessing the money required to pay your staff becomes increasingly difficult. Payroll is often one of many businesses' most significant regular outgoings, including accounting practices. Not paying your people on time will soon destroy worker loyalty and damage morale.
Late debt payments or defaults
Another problematic issue for accounting practice cash flow is maintaining regular loan payments. This can exacerbate the cash flow problem when you add interest charges and start racking up additional fees due to late payments. Eventually, this will also impact the business credit rating of your accounting practice, affecting your ability to borrow in the future. Repairing also takes a while, even when cash flow has returned to positive.
Legal action
Where negative cash flow results in unhappy creditors who are unable or unwilling to wait for the money they are owed, your accounting practice may also face legal action as some will actively pursue other ways to recover their cash.
How to avoid accounting cash flow problems
Accountants partner with clients to help them resolve financial issues and build a long-standing accountant-client relationship. Sometimes this can involve accountants delaying their practice fees to help their clients get on track, and by doing this, they can jeopardise their cash flow and cause uncertainty.
Before tackling this poor cash flow, below are some examples of how to avoid cash flow problems arising for accountants in the first place. Take time first and check if your practice is already mitigating the risk of negative cash flow with all of the following action points.
Don't automatically expect to make a profit
Enthusiasm is a wonderful thing, but don't be one of those over-confident start-ups that assume that new clients will automatically arrive by simply opening their new premises or launching a new website for your accounting practice. When you've already spent cash on getting to that point, remember that it might take some time to start reaping those rewards.
Check out our blog: starting an accounting practice: a definitive guide, for more information on this topic.
Create the right budget
Ensure you are realistic and accurate with your cash flow budget. Consider how much cash is expected to come in and when (not every client will pay on time) and align that with what you wish to pay out over a given period. Your bills or staff shouldn't be paid late – however, some of your clients may feel it's OK to decide their payment terms rather than meet yours.
Look at past payment performance for your regular clients
When you're pulling together your cash flow plan, you can dig deeper and assess when specific accounting practice clients are most likely to pay but look at what's gone before.
Unfortunately, some clients will think it's acceptable to pay weeks (or even months) after an accounting service has been provided – and do so as a matter of course. You can plan for this.
You can also introduce 'incentives' to pay on time, such as early payment discounts, or disincentives, such as late payment fees, to try and address the issue with serial offenders.
Consider overhead costs and look for possible savings
Having the best equipment and the most admirable work environment for your practice is great, but sometimes it's necessary to rein in spending while trying to manage cash flow tightly.
Have you examined all the possible options to keep overheads to a manageable level? And are there some expenses that could be delayed or reduced?
Focus on accounts receivable
An accounting service can't truly be counted as a sale until you've been paid – so ensure you have good procedures in place.
From invoicing quickly to setting clear terms and chasing up late payers, staying on top of your accounts receivable activity is a proven way to ensure you don't simply drift into choppy waters on the back of clients who are not paying on time.
Give yourself enough of a cushion
Suppose you run your cash flow budget too tightly. In that case, problems occur when the unexpected happens, such as a client defaulting unexpectedly on their payment or even going out of business whilst still owing you money. Things do go wrong sometimes, so have a potential fallback fund so their issues don't create problems for you.
Don't over-order
It can be tempting for office-bound accounting practices to over-order supplies because you'll use them anyway. But tying up money in your inventory is a common way to cause cash flow problems for accounting practices. If you don't get through it as quickly as expected, converting unused stock back into cash is usually impossible without losing money.
How to solve accounting cash flow problems
It's OK to have cash flow problems from time to time. Remember that the business world, even in accounting, is uncertain, with no guarantees.
To get your practice back on track and avoid the issues that negative cash flows can cause, check out these 8 ways to solve cash flow problems.
8 ways to improve cash flow for accountants
1. Actively encourage clients to pay on time
Although offering every client the same terms is undoubtedly common (and simpler), you could be missing a trick. Differential pricing, early payment bonuses, and late payment penalties are all proven methods for improving cash flow.
You should ensure your accounting practice management software can help support your processes effectively, but you should see some improvements in the long run.
To think about new ways of communicating with your clients, and deepening your relationship with them, read our blog: mastering client relationships for accounting practices.
2. Look for staff cost savings
When payroll is a large part of any business outgoings, it's also an excellent place to look for potential savings. Consider whether some staff might want to go part-time. What does your temporary staff bill look like – and could you make savings by outsourcing or offshoring accounting jobs rather than paying a salary to full-time staff members? For more information on accounting outsourcing, read our blog: accounting outsourcing vs. hiring an accountant: what does your practice truly need?
Even encouraging your accounting team members to work more from home can affect heating, lighting and space rental costs. For more on this topic, check out our blog: flexible work arrangements for accounting practices.
3. Consider the impact of new assets and investments
If you're on a growth pathway with a detailed business plan, you might have capital expenditure or investment looming. Before committing to any new expenditure, ensure your cash flow forecast and cash cushion are robust enough to manage if circumstances change. There's no point in sticking to the business plan if the stretch subsequently puts the stability of your accounting practice at risk.
4. Check your accounts payable terms
Do you offer standard 30 days payment terms for your accounting firm clients? How does this compare with others in the accounting industry?
It's worth assessing if your accounts payable terms and procedures are still in step with the accounting industry. Competitor practices might be taking part payment up front and the balance on completion (which, of course, is great for cash flow). Or you might be the only one left offering generous payment terms and find that others expect and receive their payments in less time than you are used to. If there's no incentive to pay you quickly, why would your client bother to?
5. Cut unnecessary spending
It might sound obvious, but as one of the ways to improve accounting practice cash flow, this is one of the most effective ways to make a difference quickly.
Some accounting practices find that asking employees for their ideas is an excellent way to discover new savings that haven't been thought of before. Cost-cutting doesn't always have to be negative – sometimes, it can be a way to recognise accounting team members for their innovative ideas.
6. Make it easier for clients to pay you
The days are long gone when accountants' clients are invoiced in the post. Many innovative ways exist to pay for goods and services, such as contactless, digital currency, mobile payments, and third-party payment platforms.
CA ANZ members can also access SmartFee, which funds accounting fees upfront while allowing your client to pay the total amount in monthly instalments.
So, consider how easy it is for your clients to pay you. You can even use client relationship management software to communicate with your client based on what payment methods they would like to see to make their lives easier.
For more insight on communicating with clients who aren't paying on time, check out our blog: dealing with difficult clients for accounting practices.
7. Consider accounting automation software
Consider accounting automation using accounting practice management software when billing clients. You can also use accounting client management software to set up automatic payment reminders for greater transparency regarding who is not paying.
Learn more about the power of automation in accounting in our blog: what does automation mean for accounting practices?
8. Maintain a cash flow forecast
Staying on top of your cash flow means keeping up-to-date on the details. Your cash flow forecast should provide the information you need to see clearly your cash flow position and how it spans the next 12 months. Read on to find out how to improve your cash flow forecast.
How to improve cash flow forecast
Measuring the cash flow going into your accounting practice is the data that constitutes a cash flow forecast.
What can make a difference, however, is how much detail and how accurate your cash flow forecast is. Improving your cash flow forecast and ensuring it is kept up to date will benefit your accounting practice in multiple ways.
- Provide greater insight to support business decisions
- Build stakeholder confidence that cash flow is robust
- Show early signs of potential issues
One proven way to improve cash flow forecasting is to use software to crunch your numbers. Many cash flow forecasting solutions are available, so it's essential to consider the size and complexity of your accounting practice before choosing your provider.
Fathom combines business planning with powerfully simple three-way cash flow forecasting, so you can confidently plan ahead for your accounting practice.
Improving cash flow with data management and analytics software
As we have seen, the key to improving cash flow is having complete transparency across your accounting practice data, ensuring it is accurate and up to date.
Our data management and analytics software is a centralised data warehouse and analytics platform built for accounting practices. When integrated with accounting practice management software, you'll get instant access to data and insights with pre-built analytics, dashboards and flexible data visualisations for your practice, including your cash flow performance over time, analysing both paid and invoiced client payments to make great data-driven decisions for the future.