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Mastering cash flow management for accounting firms

In this guide, we identify common cash flow mistakes, suggest effective strategies to maintain cash flow and discuss how tech can help cash flow management.

Jon Davis · October 2, 2023
Mastering cash flow management for accounting firmsMastering cash flow management for accounting firms

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If you’re an accountant running your own firm, you understand the importance of cash flow.

You appreciate the numbers, the formulas and the significance of every financial transaction. Yet, managing cash flow in your accounting firm can be a very different ball game.

In the world of accounting, cash flow is the lifeblood of your firm. In this guide, we’ll see some common cash flow mistakes, effective strategies to help maintain cash flow and how technology can help improve cash flow in accounting firms.

Understanding cash flow in accounting firms

Cash flow, in its simplest form, is the movement of money in and out of your firm. For any business, including accounting firms, cash flow is more than just numbers on a spreadsheet — it’s about ensuring the sustainability and growth of your business.

A positive cash flow ensures you can meet your operational expenses on time, from salaries to rent and utilities.

You’ll also be able to invest in new opportunities with confidence, whether that’s expanding your team, upgrading your infrastructure or venturing into new service areas. On the other hand, neglecting cash flow puts your entire accounting firm at risk.

Cash flow also impacts the way your clients perceive you. Accounting firms need to demonstrate that they’re financially healthy.

After all, if a client is going to trust you to manage their finances, they’re going to expect you to successfully manage your cash flow.

To keep your firm financially fit, you must actively monitor and manage cash flow, considering both short-term cash needs and long-term cash flow trends.

Do you have enough cash on hand to cover your immediate obligations? How does your cash flow vary over the weeks, months and years?

Knowing your cash flow allows you to spot potential problems before they become crises. By forecasting future cash flow, you can make smart financial decisions that improve the long-term prosperity of your firm.

In short, mastering your cash flow is essential for any successful accountancy practice.

Common cash flow mistakes

Even seasoned accountants can make grave cash flow errors.

cash flow in accounting mistakes

Here are some of the most common cash flow pitfalls and how to avoid them.

Not monitoring cash flow frequently enough

Many firms only look at cash flow quarterly, or even annually, but so much can change in even a month. If you’re not monitoring cash flow at least monthly, you leave yourself vulnerable to unexpected shortfalls.

Many business owners fall into the trap of thinking everything’s fine until they suddenly find themselves in a tight spot, unable to meet payroll or pay an unexpected bill.

Get in the habit of reviewing cash flow reports each month. It doesn’t have to be a long and complicated process; with the right systems and technology in place, monitoring your cash flow can take as little as 15 minutes while still providing the valuable insights you need.

Focusing only on sales, not cash

As any accountant can appreciate, there’s a big difference between sales and cash. It’s easy to get caught up in how many clients you’ve brought on and how many contracts have been signed, but until those sales translate into cash you can still run into problems.

Sales are important, without a doubt, but you should never make the mistake of tracking only sales and ignoring cash.

What are the payment terms in your contract? How long does it actually take for clients to pay their invoices? If clients pay you 60 days after invoicing, pay attention to how overdue receivables are impacting cash on hand.

Inaccurate cash flow forecasting

Knowing where your business will be next quarter (or even next week) can feel impossible. The last few years have shown us all just how unpredictable business (and life) can be.

cashflow charts for accountants

However, that doesn’t mean you shouldn’t try to accurately forecast your cash flow.

Planning and budgeting with inaccurate cash flow projections is a recipe for disaster. Being overly optimistic about future payments can lead to overspending while being too cautious can stunt your growth unnecessarily.

Base your forecasts on actual data and facts, not hopes and guesses. Then, when things change and new information is available, update those projections to account for the latest data.

Relying on financing to overcome cash flow deficits

When cash reserves dip, some firms instinctively reach for a line of credit, but financing should be a last resort.

Not only does this ignore the cause of the cash flow issue in the first place, but it’s also going to be trickier to get favorable rates if you’re struggling financially.

First, review your budget for any areas where you can cut (or at least delay) costs. Expenses like office furnishings, travel and marketing initiatives are often easier to reduce in the short term.

Saving money in the right places will allow cash flow to recover while minimizing the impact on daily operations and client work.

No cash flow buffer

There are no certainties in life and even the most well-run firms will undoubtedly face times with poor cash flow. Build wiggle room into your budget with a cash flow buffer — extra cash savings to tide you over in lean times.

Shoot for a buffer equal to two to four months of operating expenses. In most cases, this will be enough to insulate your firm from any unexpected bills or late payments. Make building your cash buffer a top priority.

Avoiding these common mistakes takes diligence, but the work pays dividends in your firm’s stability and success.

Effective cash flow management strategies

Now that you know what not to do, let’s talk tips for mastering cash flow management: Implement robust cash flow forecasting As mentioned earlier, accurate cash flow projections are crucial. Build comprehensive forecasts that incorporate:

  • Historical cash flow data
  • Accounts receivable timelines
  • Seasonal dips and spikes
  • Upcoming expenses
  • Conservative revenue estimates

Update your cash flow forecast monthly and adjust budgets accordingly. Planning precision forecasts enables you to spot potential cash crunches early and plan accordingly.

Rather than setting static annual budgets, use rolling forecasts that provide 12-month projections based on your most recent monthly results. This allows budgets to dynamically adjust to changing conditions.

Optimize your invoicing process

The way you invoice and charge clients can have a significant impact on your cash flow. A streamlined billing process means your invoices get out quicker and are paid sooner.

While we’ll take a closer look at technology later, it’s worth noting that many parts of the process can be automated, such as calculating invoice amounts and automatic payment reminders.

accounting cashflow processes

You can also improve cash flow by offering multiple payment options. Alongside traditional payment methods, consider offering online payments, bank transfers or even monthly installment options for larger amounts.

Maintain strong client relationships

Never lose sight of the person behind the invoice number. Your relationship with your clients is a key part of your business and can directly impact cash flow.

For example, if a client is having difficulty paying an invoice, putting a payment plan in place can ease the burden on them while ensuring that there’s still cash flowing into the business.

Similarly, you might offer a discount for early payment, rewarding the client while boosting cash flow.

Talk with your suppliers

The same principles apply to your vendor relationships. Discuss terms with your suppliers to see if there’s any flexibility to help your cash flow management.

Just as you might offer clients an early-payment discount, ask whether there’s a discount for paying invoices ahead of schedule.

accounting vendors

Similarly, a vendor is likely to prefer extending payment terms to net 60 or net 90 days if that means they’re going to get paid.

With strong vendor relationships, suppliers are more likely to be willing to work with you and find different solutions should cash get tight. Build those relationships now, before you need them.

Technology’s role in cash flow management

Along with the tips and strategies we’ve already discussed, technology and software can also simplify and enhance your cash flow management.

Many accounting firms may start with spreadsheet software, like Excel or Google Sheets. However, while these tools can technically help manage cash flow, they’re still limited.

As a result, most firms use dedicated accounting software. Today’s platforms feature cash flow dashboards that automatically populate with information from your system, cutting down on manual data entry.

Xero integration for better cashflow management

Other software can take care of specific aspects of cash flow management. Tools like Xero and Sage make invoicing simple, while software like Expensify and Rydoo helps monitor and categorize expenses, giving you a clearer picture of your outflows.

A big part of managing cash flow is managing your relationships, which is where customer relationship management (CRM) software comes in.

For example, Capsule’s Contact Management enables you to store all your client information in one central location, so you always have the details you need to hand. In turn, you can track clients through the sales pipeline through to project completion (and payment!).

When it comes to forecasting future revenue, you can use Capsule’s Sales Analytics feature to see the value of opportunities in your pipeline and when you can expect payments to land in your account.

While no software alone can guarantee positive cash flow, it can certainly simplify the task. Integrating a robust CRM for accountants provides visibility, efficiency and control over the cash flow drivers that impact your firm’s success.

Build a strong accounting firm with a positive cash flow

At its core, cash flow management comes down to planning, monitoring and optimization. By taking a proactive approach, accounting firms can safeguard their financial health even during difficult times and economic uncertainty.

While cash flow mastery takes continuous effort, the payoff is immense. By avoiding typical mistakes and implementing the right strategies, your accounting firm can confidently manage cash, fuel growth and prosper for years to come.

Learn more about Capsule CRM with our free 14-day trial.