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How to advise clients on cash flow management in the digital era

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Cash flow management is going through lots of changes in the digital era. In the past few years, more and more technology has emerged to help accountants and their clients deal with manual processes more efficiently.

The trend isn’t stopping any time soon, and with initiatives such as Open Banking and Making Tax Digital (MTD) being introduced by the UK government, even more helpful tools and changes can be expected.

MTD, for example, will help ease administrative burdens. Digital records of VAT invoices and receipts will make the process faster and less complex, and HMRC will have a more accurate up-to-date view of your client’s accounts.

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Shifting to a more advisory position

MTD not only means automated processes, it also means the accountancy profession will shift to an even more consulting role. By April 2019, businesses will have to use software to submit their tax returns, which means some clients may need your advice on suitable technology as well as more tax or finance-related questions.

For instance, with MTD, business owners will get updated income tax estimates at any time, which will help them forecast cash flow. Therefore, cash flow management might become a bigger topic. This could be a good opportunity for you to add more services and nurture the relationship with your clients.

Here are some key facts you should bear in mind when advising your clients.

A simple rule that isn’t always easy to follow

While every business is different, there’s one simple rule that every business should follow to improve cash flow – reduce your outgoings, or increase money coming into the business. For most entrepreneurs, this may be easier said than done when essential business expenses are running constantly.

Also, if there’s a new project on the horizon that could increase revenues in the long term, it’s a shame to miss out because of cash flow problems in the short term. How can your client fund a new project when working capital is tight?

This is when alternative business finance comes in handy, and could mean your client can safely pursue opportunities that wouldn’t be possible otherwise. Let’s take a look at a few scenarios your clients might find themselves in, and which types of finance could help.

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Use finance for new projects

Let’s say your client wins a new customer. This project could be good news in terms of revenue, but having to pay their supplier in order to fulfil this job may leave your client with a tricky cash flow situation. Invoice finance is designed to give your client cash from unpaid invoices, which effectively brings forward payment terms.

If your customer is trading overseas, the pay cycle is even longer – trade finance is designed for this scenario and the lender will pay the supplier directly so your client isn’t out of pocket for as long. This type of finance can even be combined with invoice finance, so the two most common reasons for cash flow struggles can be prevented.

Map out a ‘Plan B’

Maybe your client doesn’t need to fund a specific project but wants a bit of stability in a tricky period. A lot of businesses are affected by occasional cash flow gaps, whether it’s caused by seasonal fluctuation or unexpected bills.

Revolving credit facilities are a more general option that offer this kind of flexibility: They work similarly to a business overdraft and can be your client’s safety net for when cash flow is strained.

Your client will get a credit limit from which they can draw down funds whenever they need – even just for a few days. Interest is only paid on the outstanding amount for as long as you use the funds, so it’s a good Plan B to have just in case.

Cash flow management and Making Tax Digital will go hand in hand
Cash flow management and Making Tax Digital will go hand in hand

Look at the bigger picture

When advising your clients on cash flow management, it’s crucial to always look at the bigger picture. It may not seem straightforward to use alternative finance for cash flow requirements but some extra cash for a certain time can trigger a positive chain reaction for your client’s business.

For example, one customer recently used a revolving credit facility to get an additional vehicle. In turn, this allowed him to hire a new member of staff, which enabled his business to serve more customers. Without the facility, the business would have either put its cash flow at risk, or it wouldn’t have been able to purchase the vehicle at all.

Use funding to pay tax bills

When looking at your client’s case, try to identify recurring reasons for cash flow issues. You may find that a lot of clients struggle with tax payments since they take up a big chunk of capital in one go.

In January 2017, UK businesses owed £2.6bn in overdue VAT because they couldn’t sustain enough working capital to meet tax deadlines. So even if your client is putting money aside, it doesn’t mean their cash flow will be steady once corporation tax or VAT has been paid.

Your client could use a tax bill loan to spread the cost and pay in more affordable instalments. Some clients may be shy about it but there are benefits to funding a tax bill and some lenders offer loans specifically designed to finance a tax or VAT bill.

For example, interest paid on a VAT loan is accounted for as an operating cost, which could bring down gross profit and reduce the corporation tax bill.

Final thoughts on cash flow management

MTD may open doors to new opportunities and more clients. In addition, there are tools and apps that can help track income and expenses, so you and your client can understand their cash flow better.

Alternative business finance can be a springboard to smooth cash flow levels, which may enable your client to take their business to the next level. And the good news is: most of these funding options can be set up in only a few days, so your client will have the funds in their account really quickly.

However, speed and flexibility usually come at a price, and some of the options tend to be more expensive. It’s still worth looking, because if your client faces a difficult cash flow situation, it’s good to know that there are solutions to it.

How is your practice helping your clients with cash flow management? Let us know in the comments below.

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