The Importance of Cashflow Management

Profitable firms sometimes have no money.

“Cash is king” is a common phrase that signals to business owners that they should pay close attention to cash flow and its management. Businesses can be topline strong or have steady bottom line profits, but without cash they cannot move forward. Cash management, when done properly, can indicate oncoming issues and ongoing problems, and drive solutions.

For creative companies, such as design, engineering, or communications practices, the largest asset tends to be Accounts Receivable. The main source of cash is from collecting from these accounts in a timely manner. Often, firms don’t have – or don’t follow – proper processes for managing their cashflow. Many firms assert that it’s not their fault they have cashflow issues, and that they’re the ones not getting paid by their clients. If your firm is not collecting it money, it needs better clients, better processes, or a combination of the two. If your clientele consistently delays payment, you need to plan for this.

A key risk with aged accounts receivables often is that they tend to be written off, which directly impacts the bottom line. tImproper cashflow management reflects poorly on your business and can damage relationships with your firm’s subconsultants, clients, and staff.

 

It is the responsibility of the business leaders to ensure their firm is solvent which, ultimately, determines the survival of the business

Many business owners review the cash balance and make assumptions on solvency. They are looking at a specific point in time, rather than the dynamic nature of their business. This is where cashflow and cashflow management processes become critical. It projects expected revenues and expenses and sets goals for the firm and employees to meet to ensure the business’ success and solvency. When companies do run into cashflow problems they depend on their working .  A quick way to check the health of your business is by using two useful formulas: Working Capital and Days A/R Outstanding.

  • Working Capital = the difference between current assets and current liabilities. In other words current assets are cash on hand, account receivable and other short term investments. Current liabilities are accounts payable, operating line of credit, taxes and other liabilities due within a year.  This formula gives you a quick check to see if have enough assets to pay your bills that are due in a year.
  • Days A/R outstanding = (Average AR / Net Revenue) x 365 days.  The results demonstrate the number of days it takes your business to collect on accounts receivable.

Making these simple calculations with your practice’s financial information may give insight into the financial health of your practice. Ultimately, cash management is managing your collections against your operational expenses with the goals of achieving and maintaining positive cash.

 

It’s not all about solvency.

Though in severe cases, issues with cash flow can lead to insolvency, this is not usually the case. Managing your cashflow is important because it can unlock value for your company and increase the reward to owners. It helps you mitigate risk, plan investment, and collect from accounts for which you have rendered services. It can give you insights into your company and help you make strategic decisions.

Proper attention and processes to cash management can help avoid extensive use of credit or those jarring realizations that employees, subconsultants, and rent cannot be paid on time. It can also bring to light opportunities to realize more of the profit you are earning and promote growth. Systems and processes for managing cash can free business owners’ time up, allowing to spend more time on creative projects and business development.

 

Getting Started.

Our team has extensive experience in helping creative businesses develop and implement solutions that help them manage their cash and improve their financial performance. We work with business owners and their teams to ensure alignment on goals and a common understanding of process. With proper approaches to managing cash and finances, firms can focus on – and achieve – their creative and commercial objectives.

 

 

Author: Basima Roshan, CPA, MBA