Helping business owners to understand their true cash flow – predicting and understanding future income and outgoings as well as the overall impact on the balance sheet – is a fundamental part of your role as a business adviser…
Which is why we’ve been flabbergasted by some of the dubious advice we’ve heard less enlightened accountants doling out to clients.
For many start-ups and owner-managed businesses, their view of cash is based almost entirely on their bank balance – and that’s an ill-advised approach to take.
Money in the bank = the current funds available in the business bank account. It’s the money the business has been paid, that hasn’t yet been spent on purchases, wages, costs and overheads etc.
Cash flow = the pipeline of potential money that will come into the business within a given time period. So, for most clients, their cash flow will be a monthly overview of the payments they can expect to receive (income), minus the costs and overheads they know they will have to pay out (outgoings).
Here are three examples that underline the need for firms to update their approach to cash flow conversations:
1. ‘The budget is primarily about your outgoing cash’
Considering a budget – i.e. what the client has planned to spend – without understanding the income that will pay for this, will be problematic at best (and foolhardy at worst). To have a rounded and insightful overview of the health of a business, it’s critical to consider both the income and the outgoings. After all, if the latter is greater than the former the client’s business is likely to go bankrupt in a very short period of time.