Auditing your Accounting Functions to Improve Cash Flow

​Are your accounting activities hampering cash flow? When companies are looking for ways to improve their accounting department, they too often focus on the what and not the why. They decide to increase the frequency of bank reconciliations, look for cost cutting opportunities, and search out software that can streamline reporting. But what can get lost is why these activities are so important. 

An accountant analyzing cash flow charts on a computer and clipboard.

It all comes down to cash flow management. Cash flow is the tie that binds. Everything your accounting and finance personnel do is centered around managing the company’s finances to ensure they can acquire customers, run daily operations, pay staff, meet financial obligations, make necessary expenditures, and reinvest into the company. Simply put, they ensure that cash will be there today and tomorrow to keep the business going (and hopefully growing as well!). 

​With this in mind, it is important to frame accounting improvements in terms of how they can positively affect cash flow. Let’s take a look at how you can audit some of your most common bookkeeping and accounting activities to look for ways to improve cash flow:

Bank Reconciliations
Doing bank reconciliations more frequently not only deters fraudulent activity and ensures that bookkeeping errors are discovered more quickly, but also aids in cash flow management. Knowing how much money is currently in the company accounts and how much is in transit provides a better picture of the company’s cash position. As a result, a business can determine if they have the money needed to cover ongoing expenses and strategically time investments and large purchases.

Pricing
Pricing is usually framed in the context of profitability (as in, “How much do we need to charge to cover our expenses and achieve desirable margins?”) but it is also a key cash flow management tool.

Payment terms and prices are crucial ways to maintain cash inflows as products are sold and services are provided. Companies that understand this can use pricing techniques to improve their cash flow management. By adjusting payment terms and offering variable pricing businesses can encourage customers to pay more quickly, thereby increasing cash flow.

These types of adjustments can act as either incentives or as penalties to speed up payments. For instance, a company may offer a percentage discount for customers that pay on NET-15 terms instead of NET-30 terms. Alternatively, a company may offer the same pricing to all customers but penalize late payments with an added fee or require that customers agree to shorter payment terms to be retained as customers.

Customer Invoices
If you do not bill the customer, you cannot get paid. Sending invoices in a timely manner is instrumental in getting paid faster because there will always be a lag between when a service or good is provided and when a bill is sent and then again between when a bill is received and when it is paid. With the rise of credit card usage (even among B2B transactions) this second gap is getting shorter all the time. However, it all hinges on how quickly the invoice is sent. Using a robust accounting software allows your employees to send invoices immediately by automating the process when a product is purchased or a service provider is on site. If you are still batching invoices, you need to modernize your accounting functions.

Vendor Invoices
Your customers need to pay you and you need to pay your vendors, suppliers, and partners for their contributions. But that does not necessarily mean that you need to pay on their terms. If you have a good relationship with your vendors, you can always ask them if they would be willing to budge on their terms. If you have been timely with your payments in the past, they may be willing to work with you on their rates or their payment timeframes. Negotiating payment terms is a shrewd way to hold onto your money longer. But always be sure to double check revised agreements to make sure there are not any unfavorable clauses or provisions included that could pose problems in the future.  

Expenses
Cost accountants deal with expenses all day every day. They are pros in determining where companies are spending their money and how to do better with the funds that they have available. But even if you do not employ a cost accountant (or hire out the services of a cost accounting consultant), every company can make expenses a priority. Look for places where you can reduce waste and gain efficiency.

In some instances, just changing the timing of expenses is enough to improve cash flow. For instance, delaying capital investments improves cash flow in the short-term so it can better plan for the long-term (especially during times of economic uncertainty).  

Evaluate where cost cutting can occur without having a negative effect on your product/service or customer experience. This may involve outsourcing some activities that you have traditionally done in house. An experienced accountant can help you with a cost-benefit analysis of outsourcing business activities to help you decide what to do yourself and what to hand off to another company to maximize cash flow.

Collections
Develop a formal payment policy, which customers must agree to before doing business with you, so you have recourse when customers do not pay. This is an easy step you can take right now to increase future cash flow. Then, when you need to pursue collections, lean on the policy for legal recourse. You may not even need to use the policy (just having it is sometimes enough to ward off unscrupulous individuals that are looking for vulnerable businesses) but it will be there for when you do need it. Companies with formalized payment policies tend to get paid quicker and have fewer transactions written off as uncollectable, both of which can help cash flow significantly.  

Keeping the Books
Having clean books is an important part of managing cash flow. Obviously, it is better to keep your books error-free as you go, but if your books have fallen into disarray due to staff turnover, an accounting approach change, or software migration, someone will need to take the time to clean them up to give you a fresh start moving forward.

Streamlining accounting activities and improving close procedures will help you to get more accurate information more quickly, which in turn improves cash flow management. Ensure you are using the right software platform for your needs and that your staff knows how to use it correctly. For companies where non-accounting staff is responsible for bookkeeping and accounting activities, this is incredibly important. As our team explains, “The benefit that a business derives from [accounting software like] QuickBooks is contingent upon what is put in and how much expertise is available to use the tool correctly. QuickBooks will not manage a business’s finances any more than a hammer will build a house without a carpenter there to swinging it.”

When you need help improving cash flow, reach out to us. Our team of experienced accountants can provide a wide range of accounting services to meet your unique needs. We will work with you to get your books in order, put formal policies in place, and audit your ongoing accounting functions to improve your financial position. Contact us today to start a conversation around how we can support your company with our accounting expertise!