The cash flow trap: How to spot it and help your clients avoid it

That’s the exact scenario I uncovered while onboarding a new client last year. On paper, things were looking good: $2.5 million in revenue, and a healthy profit margin. However, when I dug deeper into their current accounting, I found that their $110,000 in opening cash balance had slipped into an overdraft of $112,000 by the end of the year.

Now, this was a service business. They weren’t investing heavily in inventory, capital assets, or rapid expansion. The numbers just didn’t add up. 

I’m willing to bet that you’ve been in this exact same scenario with your clients. They appear profitable right? The numbers look good? But the client is moving further into debt, with no sense of how they got there. 

That’s because profitability alone doesn’t tell the whole story. 

When I sign a new client, my first step after doing the discovery call is to get access to their accounting software and do an in-depth financial review. It's one of my favourite (and most important) parts of client onboarding. I get to take a deeper dive beyond what I’ve learned in discovery and get a clearer picture of how the business operates. 

For me, Karbon is the source of truth that helps tie everything I’ve learned together. It connects what’s actually happening in the business to the bigger picture.

To truly identify where a client is healthy, I need to connect profitability to cash flow. That means looking beyond the P&L. I can now get a bird's eye view on problems, patterns, and highest risk, and use those insights to help my clients as they grow. Without that source of truth, it’s easy for things like overspending, inefficiencies in the company, or poor decisions around growth to lead to a deficit. 

The real question is: how do we actually communicate those insights to our clients in a way they can understand easily and act on?

It starts with understanding cash flow.

Why cash flow matters

For many small business owners, and quite a few accountants that work primarily with these small businesses, the P&L is what serves as the roadmap for most financial health or planning discussions. 

Has revenue grown year-over-year? Has gross margin remained consistent? Is net income a reasonable percentage of revenue? These are metrics that are commonly used to benchmark financial health. However, what many small business owners don’t realize, and what many accountants forget, is that profit is only theoretical—cash is actual reality. 

Cash is the lifeblood of all businesses, the oxygen that they breathe and what they need to stay alive. Without cash, employees don't get paid, supplier invoices start to pile up, and that's when businesses tend to get into trouble. 

So as small business advisors, why aren’t we talking about cash flow with our clients more often?

How to start talking to your clients about cash flow

Don’t wait for a client to specifically request a forecasting engagement or a cash flow analysis. There’s no need to overcomplicate the conversation with complex service offerings right away—simply begin the conversation.

Here's how our firm bakes cash flow discussions into standard monthly reporting:

• Start with what clients know. The first section of our monthly financial reports is a P&L. It's familiar to most clients and easy to understand. You can build this into your workflows in Karbon, to make sure you’re delivering consistent updates each month.

• Explain the connection/the difference. I also conclude my analysis of the P&L by talking about profitability, and remind my clients that profitability is great, but we need to make sure that profit is turning into cash. This reiterates to clients that profit doesn't equal cash flow and reinforces that they need to focus on both.

• Don’t overcomplicate it. You don't need any complicated models to start talking about cash flow. Start with a simple cash flow statement format to explain how profit, adjusted for balance sheet items, equals the change in the cash balance. Another format that I've found really works to help clients understand their cash flow is to take the monthly bank reconciliation and group clearing items into categories like ‘paying bills,’ ‘payroll,’ and ‘loan repayments.’ This showcases what clients are spending their cash on each month.

• Carry on the conversation. Once you've given cash flow information to clients, make sure to follow up with a meeting or phone call to keep the dialogue flowing.

Top cash flow tips

While every business is unique and needs to be advised differently, there are several common cash flow tips that I teach my clients.

1. Review financial statements regularly. Not only does reviewing this information regularly mean that clients will be more tuned in to the financial health of their business, it also presents you, as their advisor, with plenty of opportunities to pitch advisory services that can help solve financial pain points. Use your single source of truth to help make sure that you’re up to date, and not missing out on important information or patterns that could be negatively affecting your clients.

2. Develop solid billing and collections policies. Most business owners jump immediately to cutting costs when they want to improve profitability or cash flow, but there's a better alternative. Price increases, early payment discounts, and tracking the average number of days it takes to collect AR can have a big impact on cash flow.

3. Focus on margin, not revenue. Clients will focus on revenue growth and taking on any customers, projects, or deals that will boost revenue. However, if they don't understand how much that revenue is contributing to the bottom line, they may find that these customers or projects are costing more money than they are making, which will quickly lead to cash shortfalls.

4. Pay attention to upcoming obligations. Managing a business by what's in the bank account doesn't consider significant obligations that may be coming due. This can include things like tax balances owing, monthly or quarterly tax instalments, loan repayments, and payroll remittances. Missing these payments can result in interest or late penalties, and not planning for them can mean that cash needed for growth projects or paying staff is suddenly no longer available. Even a simple, two-week Excel forecast is better than no forecast at all.

5. Don't pay supplier invoices right away. Business owners want to be paid on time when they send invoices for their customers, so they try to be good customers themselves by paying supplier invoices right away. Trying to be a good customer can put a tremendous strain on their own business' cash flow, so make sure they take advantage of the payment period available to them. 

Turning conversations into valuable advisory services

Now that you've started the conversation around cash flow, you've done two very important things:

1. Established yourself as someone that can help clients with more than just their bookkeeping and tax compliance.

2. Given your clients a sample of the type of practical business and financial advisory that you're capable of. 

Looking forward

From here, you can offer a monthly cash flow forecasting engagement, monthly or quarterly CFO touchpoints, or any other type of financial advisory work that you feel comfortable offering to clients.

At their core, advisory services are as simple as talking with clients regularly. Adding cash flow into that discussion is a high-value step that you can easily implement right away. The next time you send a financial report to a client, include a note or record a quick Loom video to show them how their profit did or didn't translate into cash in the bank.

Once you've got the cash flow conversation flowing, you'll be surprised by how quickly clients will want more!