September 2003

Cash Flow: The Artistry Of Accounting
By Leonard Leff

Cash flow is essential to a business’ health and is often a reliable indicator of the business’ income opportunities. Cash flow can reveal how a proprietor has allocated available funding. Has it been used carefully, wisely, and to good business advantage? An accountant who prioritizes cash flow enables the company to enjoy financial strength and stability. Ready cash flow allows a company to pay its bills, earn the respect of vendors, take advantage of discounts, save on interest expense, make better deals, and more.

For many accountants, telling a business owner about the role cash flow plays is a sensitive issue. Some accountants avoid raising concerns about cash flow problems or minimize the issue until the situation is critical. Depending on how an accountant describes a cash flow problem, it may be the first fracture in the business owner/accountant relationship. If a company appears to be functioning, and the lack of cash flow is a problem, the onus could be placed on the accountant as to why proactive, preventive action wasn’t recommended. The accountant can be a convenient scapegoat.

A proactive stance includes offering a workable financing solution. The accountant needs to take the initiative by demonstrating the true value of cash flow. At first, obtaining regular cash flow from a lender may appear to be a costly luxury. When a company pays $2,000 to $3,000 per month on financing invoices or receivables of $100,000, it is sometimes viewed as a questionable financial extravagance. But very often the company is capable of achieving much more with a strategic cash flow.

A company operating with regular cash flow communicates a level of confidence to its employees (who often have a very good sense about what is going on). In companies that suffer from poor cash flow, employee morale is often low, productivity slumps, and even loyalty is affected. Paying a premium for cash flow gives a business proprietor peace of mind, and less anxiety and stress.

But be warned: Cash flow installments must be used with discretion. Regular mentoring and guidance is often needed from the CPA so that money is spent on focused business goals. Many business owners are tempted to view cash flow funding as a nest egg they can squirrel away, or to personally indulge themselves every now and then.

Eventually, however, a responsible business owner who uses financed cash flow will see the wisdom of growing the business this way. Taking on additional accounts and increasing sales often means extending credit to customers and waiting for payment on invoices. In a perfect world, healthy businesses would not have to finance regular cash flow, but in the real world, unpredictability is the rule.

By meeting the cash flow challenge, business owners will gain an understanding of the vital contribution their accountants bring to the business process. Accountants who can effectively advise business owners on managing cash flow are practicing the true artistry of the accounting profession.

Leonard Leff is the president of the CDS Companies, based in Lynbrook, N.Y.

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