Cash is the lifeblood for an organization of any size. Cash management is a process of managing cash inflows and cash outflows. The financial stability of an organization depends on the effectiveness of its cash management practices. Poor cash management often leads to liquidity risk. Organizations that fail to collect aging receivables or overspend on the least important areas would face liquidity risk.
Charged Public Accountants (CPAs) often run into liquidity risk because of their inability to implement cash management principles. This article identifies the mistakes in cash management for CPAs and enables them to implement better cash management practices.
Not Following-up on Aging Receivables
Accounts receivable is the money held by clients even after delivering products and services. The aging receivables reduce the cash inflows and force the organization to look for alternative sources of finance. Accounts receivables pile up when the organization fails to follow up with the clients for the pending payment after the services are delivered. Most CPAs fail to follow up on aging receivables when they don’t have a proper system in place for tracking.
Cash management software like Dryrun helps organizations, including CAPs, segregate the accounts receivables based on their age (15 days, 30 days, 45 days, and 60 days) and trigger a follow-up notification to relevant teams. CPAs should give as much priority to collecting money from clients as they give to delivering services.
Engaging in a project-based finance engagement and not establishing a long-term contract
Organizations survive when there are consistent cash inflows from clients; this is possible only when the organization establishes a long-term contract instead of a project-based financing project. Most CPAs ignore the importance of establishing a long-term contract with customers.
The long-term contracts put a certain amount of money in the CPA’s checking account irrespective of whether the client assigns the work or not. CPAs should explain the benefits of long-term contracts over project-based contracts to clients and convince them to sign the dotted lines of long-term contracts; this is possible only when CPAs create a killer offer for long-term contracts at an attractive price.
According to the research conducted by Fred Reichheld Bain and Company, acquiring a new client is five times more costly than retaining an existing client. In the financial services business, a 5% increase in customer retention results in an increase of 25% profit. So, long-term contracts would also reduce the operational expenses and boost the net revenues of CPAs.
Not Pricing Services Appropriately
Most CPAs have a lot of clients but suffer from poor financial stability. Offering services at lower prices then the industry average could be a reason for this situation. The low-priced services create an imbalance between cash inflows and cash outflows.
CPAs should use flexible pricing strategies based on cash inflow forecasts and sales forecasts. If the sales forecasts indicate that there would be a steady flow of clients for the next 3 to 6 months, the CPA could pitch services at the premium price for accepting new clients; this is a simple rule of increasing the price when the demand for the products or services is higher.
Unless a forecasting system is in place, it would be difficult for CPAs too forecast sales and cash flows. CPAs can use a financial modelling platform like Dryrun to forecast future cash flows and fix the prices for services accordingly.
Not Engaging in Scope Review
The scope is a document that comprises information on the cost, time, and resources required to complete a project. Before entering into a business contract, both the parties, vendor and client, signs a document that discloses the scope of work. The scope document gives clarity on the deliverables of the project.
The scope of work determines the compensation that a client pays to the vendor. However, the scope of the project never remains the same. The factors like managerial constraints, stakeholder requirements, and legal constraints could change the scope of the work.
Most CPAs who engage in long-term contracts with their clients fail to review the scope in regular intervals. Due to this, they’ll end up spending more time and allocating more resources to the client at the initial agreed cost.
To effectively manage the cash, CPAs should regularly review the scope of work, alter the quotation and collect the money on time from customers.
Not Building an Advisory Skillsets with Existing Clients
Business contracts would last long only when service providers put themselves in the shoe of clients and address their issues. Not all customers are the same. The requirements and expectations vary from customer to customer. Service providers need to build advisory skillsets that meet the expectations of customers.
Organizations expect CPAs to act as their business partners. They want CPAs to offer advice in areas such as taxation, technology and regulation. If CPAs cannot develop advisory skillsets with the existing clients, they may not establish long-term contracts. CPAs will enjoy steady cash flow when they adapt for each client, build customized advisory skillsets and over-deliver results.
Not Understanding Relevance to Entrepreneurs
A CPA should remind himself that he is an entrepreneur; an entrepreneur is a person who builds and operates a business in such a way to enhance profits. CPAs should not restrict themselves to just delivering accounting services to their clients. They should adopt an entrepreneurial mindset and keep a close eye on the other functional departments like marketing, human resources and operations.
Cash management is one of the responsibilities of the entrepreneur. The following are the methods an entrepreneur would use to manage cash.
1. Standardize processes
2. Analyze budget allocations
3. Scrutinize the variations between the budgeted amount and the actual amount spent
4. Weekly review on cash inflows and cash outflows
5. Keep a track of invoices
6. Hold staff accountable
7. Use cash management software
Unless CPAs wear an entrepreneur hat, they would not recognize the pitfalls of cash management.
Not Consolidating Thin Data-sets
The data in small and medium-scale enterprises (SMEs) is found scattered and disorganized. A business owner cannot infer anything from these thin data sets. The consolidation of these datasets helps business owners derive decision-making inputs.
Most CPAs operate as small businesses in the United States. They ignore the fact that the consolidation of scattered data helps in identifying operational pitfalls at the workplace. The consolidated data on day-to-day administration expenses helps a CPA to understand if the staff is spending unnecessarily on printing, utilities, electricity or subscriptions.
For example, the consolidated data may show that the organization has been spending $1000 per month on software that it had not used for the last six months. If this software subscription is discontinued, the organization can save up to $120000 per year. So, CPAs should consolidate the thin data sets to make informed decisions about cash management.
To conclude, managing cash is very important for the survival of an organization. We recommend CPAs focus on the following areas to avoid mistakes in cash management:
1. Quickly collecting the receivables
2. Establishing long-term contracts with clients
3. Pricing services appropriately based on the scope of work
4. Engaging in scope review in regular intervals
5. Building advisory skillsets and adapting to the client’s requirements
6. Thinking like entrepreneurs
7. Consolidating thin datasets to derive decision-making inputs
CPAs can also use cash management and financial modelling software like Dryrun to manage cash effectively and increase net profits.