How CPAs can survive cash flow peaks and valleys

Throughout the COVID-19 pandemic, CPAs have played a pivotal role in prioritizing and executing financial transactions so small businesses could stay afloat and avoid getting caught off guard by their finances. They provided guidance on liquidity options like the Paycheck Protection Program and assistance for small businesses struggling with bookkeeping, managed accounts payable and receivable, and eliminated nonessential expenses.

While CPAs have provided crucial financial counsel to clients navigating economic uncertainty, it does not mean they themselves are out of the woods. The harsh reality is that most small businesses — even accounting firms — fail within five years because they don’t have the capital or cash flow to keep the doors open.

When cash is tight, accounting firms can be forced to make some difficult decisions between important business priorities. That can mean having to choose between paying rent and paying employees, paying vendors or keeping the lights on. Keeping billable employees whole and on board is typically a main priority, but when times are tough, each business must decide for itself which priorities take precedence

How can small businesses, like accounting firms, prepare for lulls in cash flow? Here are three key areas businesses can focus their attention to weather the seasonal peaks and valleys:

Navigating cash flow bumps

Accounting is a seasonal business. Where the spring months mark the busy tax season, September and October are filled with an influx of demand and extension deadlines. So, while some months may be flush, others can be more of a challenge for cash flow. While not all businesses experience the same degree of seasonality as accountants, most have predictable times of year when business is significantly slower. It’s these lulls with large swings in revenue that make it difficult to manage cash flow throughout the year.

Accountants can actively smooth these bumps in cash flow by taking a number of preventative steps, including implementing business forecasting, which is essential to preparation and can mean the difference between surviving and not. Forecasting helps business owners spot potential threats before they happen and identify potential solutions to shore up lulls in demand and cash flow. Accounting firms should do this regularly, conducting forecasting exercises as often as necessary, and certainly more than a once-a-year business forecast. Quarterly and monthly forecasting is standard, but during extremely challenging times, it’s not uncommon for businesses to conduct biweekly or even weekly forecasts to get an up-to-the-minute view of the health of the business.

With a forecast in place, businesses can adjust their spending accordingly, create a reserve fund, chase unpaid invoices, negotiate vendor payment terms, diversify income streams, and prepare for a small business loan. Small businesses like accounting firms can also consider implementing progressive billing or moving to a retainer-based or SAAS model.

Another proactive step firms can take is to reduce expenses. Costs can always be cut, and while some can be less painful than others, making significant reductions typically involves at least some discomfort. There are multiple actions firms can take, including reducing rent by moving to a remote workplace model, offshoring certain routine tasks, and reassessing all third-party contracts. In addition, business owners could consider automating processes by adopting emerging technologies, such as a cloud-based platform, to decrease on-site computing and headcount costs and improve overall efficiency.

Setting invoice expectations with clients

Having customers not pay invoices on time is one of the most challenging and frustrating parts about running your own business. Before placing an angry phone call, keep in mind that many of your customers could be experiencing the same financial pressures affecting your business. That doesn’t excuse late payments, but sometimes a bit of empathy can help place things in perspective. That said, there are a few best practices accountants can put in place to encourage clients to pay invoices on time.

The first step is making sure you’re invoicing clients in a timely manner. While that may seem obvious, you’d be surprised by how many practices are slow to invoice, which delays payment by default. And when you send your invoices, make sure you are sending them to the correct person and that your invoice is complete with the correct purchase order number, payment terms per the contract, and the payment due date. Once invoices are issued, firms can monitor due dates and send reminders before payment is due with a list of all open invoices to ensure they will be included in the upcoming payment. Firms can also consider offering incentives for paying early, as well as simplifying payment methods by making digital payments an option. Perhaps the most important step firms can take to increase the likelihood of clients paying on time is maintaining great relationships with their clients. It’s way more difficult to delay payment to someone you know and like.

Understanding your options amid a rough patch

Every business hits a rough patch now and then. And when you hit one, it’s helpful to know what financing options are available in advance; speed-learning various financing options can add to the stress of the situation.

When faced with a rough patch, accounting firms can look to secure a line of credit or take out a small business loan. Applications offered by digital-first business credit platforms are often quick and easy, with lighter requirements than compared to a traditional bank. Some platforms transfer funds into your account as soon as the next business day (which can be a lifeline in a pinch), and provide complete fee transparency, which creates a superior customer experience.

The government has also launched various packages that are being offered through the federal Small Business Administration and through state and local governments, who are offering different programs to help small businesses navigate unprecedented situations. The CARES Act also allows a carryback of losses for five years. So, if a small to medium-sized business has experienced a loss in 2020, it can recover refunded taxes paid in the past.

As COVID-19 restrictions ease and the U.S. economy gets back on track, small businesses are beginning to rebound and focus on the future. Accounting firms are no different. When it comes to managing cash flow crunches, aim to play offense, not defense. When your business is proactive about understanding and managing finances year-round, you can build a safety net for cash flow emergencies, enabling you to focus on driving innovation and identifying other areas for your business to grow.

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