The 3 Most Shocking Things We’ve Heard Accountants Advise When it Comes to Cash Flow

Posted on 2nd May 2016 in Cash Flow

Written by Amy Harris

For many startups and owner-managed businesses, their view of cash is based almost entirely on their bank balance – and that’s an ill-advised approach to take.

Helping business owners to understand their true cash flow – predicting and understanding future income and outgoings as well as the overall impact on the balance sheet – is a fundamental part of your role as a business advisor.

Over the years, we’ve been flabbergasted by some of the dubious advice we’ve heard less enlightened accountants doling out to clients.

For many startups and owner-managed businesses, their view of cash is based almost entirely on their bank balance – and that’s an ill-advised approach to take.

  • Money in the bank: the current funds available in the business bank account. It’s the money the business has been paid, that hasn’t yet been spent on purchases, wages, costs and overheads etc.
  • Cash flow: the pipeline of potential money that will come into the business within a given time period. So, for most clients, their cash flow will be a monthly overview of the payments they can expect to receive (income), minus the costs and overheads they know they will have to pay out (outgoings).

Here are three examples that underline the need for firms to update their approach to cash flow conversations.

“The budget is primarily about your outgoing cash”

Considering a budget – ie, what the client has planned to spend – without understanding the income that will pay for this, will be problematic at best (and foolhardy at worst).

To have a rounded and insightful overview of the health of a business, it’s critical to consider both the income and the outgoings. After all, if the latter is greater than the former the client’s business is likely to go bankrupt in a very short period of time.

“You can measure cash flow using the P&L”

Regularly reviewing the business’s profit and loss (P&L) account is definitely advisable. But there’s a fatal flaw if this is how your client measures cash flow.

As you know, the P&L is a historic document. It tells your client about income (profit) and outgoings (loss) that are in the past. These are transactions that have already taken place and, as such, there’s no action the business can take to change these outcomes.

By having a proper view of the business’s cash-flow pipeline, and using the right forecasting tools to project their accounting data forward in time, the forward-thinking accountant can help clients avoid the cost-related pitfalls and seize the profit-related opportunities.

“Cash flow is most important when looking to raise finance”

When a business is looking to grow, or make a big purchase, there may well be a need to raise finance and increase the liquidity of the company.

But that’s certainly not the only time when cash flow becomes important. Positive cash flow forecasts will certainly aid the liquidity of the business, but good cash flow is a vital health check for the company at any time during the course of its ongoing business journey.

How cloud solutions make sense of cash flow

As a business advisor, being able to assist clients with their understanding of available cash vs predictable costs is a foundational part of your working relationship. These cash flow conversations will be far more forensic in their detail when your firm has access to a cloud solution that can provide the right level of granularity.

FUTRLI flips cash flow on its head. It’s not something you do once for a client which they use for funding and then never refer to again.

All these assumptions form the foundation of their business plan and it’s a brilliant way to monitor performance. You can create Boards to visualise that plan which will auto-update from the accounts package. Use this as a tool to run monthly meetings and really drive value into your conversations and their bottom line.

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