The role of the CPA in providing Client Advisory Services (CAS) is rapidly evolving, and cash flow forecasting is one essential service offering that can add tremendous value to clients. Explore how CPAs offering CAS can make cash flow forecasting a central part of their service and why this service is crucial for business survival and growth.
Why Cash Flow is Top-of-Mind for Your Clients
Cash flow forecasting is often described as the lifeline of business survival, and for good reason. The statistics speak for themselves - more than 80% of business failures can be attributed to a lack of cash. This figure is particularly striking when we consider that 20% of small businesses fail within their first year of operation, with a substantial portion of them succumbing to financial pressures within five years.
Businesses, especially small and medium-sized enterprises (SMEs), often operate on tight margins and limited capital. They can find themselves at serious risk without a clear understanding of their cash inflows and outflows. This is where cash flow forecasting becomes essential.
Seven Ways that Cash Flow Forecasting Benefits Your Clients
1. Improving Cash Management
A weekly cash flow forecast is instrumental in optimizing cash management. By having a clear picture of expected cash inflows and outflows, businesses can minimize or even eliminate the need for borrowed funds. Predictability in cash flow reduces reliance on loans, freeing up reserve cash that can be strategically reinvested to pay dividends, manage credit arrangements, and cover operational expenses more efficiently.
2. Identifying Business Growth Needs
Cash flow forecasting reveals the potential issues in a business's accounts payable and receivable cycles. Unlike monthly or quarterly forecasts, weekly forecasts offer a granular view, enabling the rapid detection of financial setbacks or unexpected fluctuations in cash flow. This proactive approach empowers businesses to maintain control over payments, identify potential rough patches, and rectify errors.
3. Understanding Client and Supplier Financial Behavior
Slow-paying clients or those that require installment payments can disrupt a business's cash flow. Regular forecasting provides invaluable insights into these payment dynamics, enabling businesses to stay organized, negotiate contracts effectively, and communicate with clients about discounts, extensions, and payment terms.
4. Understanding the Impact of Decisions
Cash flow forecasts enable businesses to gauge how their decisions affect cash flow and vice versa. Companies can take corrective action by identifying red flags like negative balances early on. Additionally, forecasts help in planning short-term financing needs and aligning investments effectively.
5. Burn Rate Insights
For businesses in growth mode, understanding their burn rate is critical. Accurate cash flow forecasts provide a clear overview of the runway at the current burn rate, helping companies make informed decisions to extend their runway.
6. Building Trust with Investors and Lenders
Regular, accurate cash flow forecasting instills confidence in investors and lenders. It demonstrates the business's commitment to financial transparency and management. This trust can lead to improved investment terms and more favorable lending arrangements.
7. Optimizing Cash Use
In cases where cash is limited or burn rates are higher than anticipated, cash flow forecasts allow businesses to prioritize creditor payments strategically. This prevents scenarios where critical creditors go unpaid, and funding is jeopardized. Accurate forecasts also aid in minimizing interest payments while maintaining liquidity.
The Role of Trusted Advisors in Cash Flow Forecasting
While cash flow forecasting is crucial, not all businesses have the internal resources or expertise to manage it effectively. This is where CAS can make a significant impact.
Financial professionals excel in managing financial data identifying and rectifying discrepancies in budgets, payments, and cash flow. They contribute to financial stability by maintaining a keen eye on a company's financial health, offering solutions to critical questions related to collections payments, and optimizing asset returns.
They also look further into the future by creating financial insights, strategies, and business forecasts. Advisors leverage industry expertise to monitor expenses, profitability, and historical cash flow trends. Based on this data, they craft long-term financial forecasts and action plans that align with a company's operations, performance, and goals.
How CPAs can Offer Cash Flow Forecasting as a Key Service
As a CPA offering CAS, incorporating cash flow forecasting into your suite of services can provide immense value to your clients. Here's how to make it a key offering:
Client Assessment
Begin by thoroughly assessing your client's financial situation. Understand their industry, financial goals, and cash flow management practices.
Customized Cash Flow Models
Develop customized cash flow forecast models tailored to the business's specific needs. These models should reflect the nuances of the company's operations, industry, and financial history.
Data Integration and Accuracy
Ensure that the data used for forecasting is accurate and up-to-date. Integrate various financial data sources, including transaction records, accounts payable and receivable, and market data, to provide a comprehensive view of the business's financial health.
Continuous Monitoring and Adjustment
A forecast is a living document. Continuously monitor the business's financial performance, comparing actual results to forecasts. If discrepancies or unexpected changes occur, work with the client to adjust the forecast and develop strategies to address emerging challenges.
Cash flow forecasting as a critical service offering can help CPAs in CAS become indispensable, trusted advisors to their clients. CPAs can empower businesses to survive and thrive by providing this critical service. Cash flow forecasting is the lifeline businesses need to navigate financial challenges and capitalize on growth opportunities.
The Dryrun team has been fortunate to talk to many of the leaders offering Client Advisory Services today and wade through the leading resources on CAS.
Tap into the knowledge and best practices with your free copy of “The New Face of CAS: The Blueprint for Thriving Client Advisory Services” to uncover the shortcuts to enhancing your advisory services and offerings.
