How to be that

financial go-to person

The next time your company or client is worried about whether it will have sufficient cash flow to . . .

·         pay its current liabilities

·         fund its capital investments

·         pay its debts

. . .you can provide the answers–and do it fast.

    All you need to know is a few simple cash flow ratios.

    You can find the numerator for the ratios–cash flow from operations–in two ways: In your company or client’s statement of cash flow, or if none is available, with a simple computation: cash revenues and cash from A/R payments less cash expenses and cash paid for payables. Do not include noncash items such as amortization and depreciation.

1. Ability to pay current liabilities. This is determined through the following short-term liquidity ratio:

    If the ratio is 1.0 or more, the company can meet its current liabilities.

2. Ability to fund capital expenditures. This is determined as follows:

    If the ratio is just 1.0, operations are not generating enough cash to fund investments. The more that the ratio exceeds 1.0, the better.

3. Ability to repay debt. This ratio indicates how many years it would take to repay total debt if all cash flow from operations were devoted to debt repayment. Make adjustments if you are using cash flow from operations for the month or quarter.

Because some of our 30,000 members freelance, we include practical tips like this one in our monthly technical briefing for members, The General Ledger (www.aipb.org/general_ledger.html). 

1.      Policy. Have a minimum fee—say, $250 to $350 a month (or what is appropriate in your locale). If you are to set up and maintain files and take responsibility for clients’ books and records, it’s hardly worth less. Best policy: Say that you are paid monthly.

2.      Timing. Explain your policy at the end of the meeting, after you get the assignment. Don’t expect clients to ask; most will not. You might say: “By the way, here’s how I work. I’m paid in full each month before I continue with the next month’s work.”

3.      Communication. Look the client in the eye and project self-confidence. What you say is less important than how you say it. Speak as though you have a standard plan (which you should), and your payment procedure is standard (“This is how I work”). Explain that there are additional charges to set up and close the books and that you will give an estimate after you see them. Point out how your write-ups will reduce their CPA fees. Express confidence in your policy and way of working (“I’m sure you will want me to do this, won’t you, Mr. Smith?”).

4.      Procedures. Use either of the following, depending on what’s right for you.

“Nice Guy.” If you don’t receive payment in 30 days, send a gentle reminder, then call in two weeks. Do the work until the end of the second month. But use caution. Bookkeepers have been burned by clients who went out of business before paying them.

“Tough Guy.” Politely set a policy of payment before work. If you have not been paid by, say, the 20th, and your policy is clear and agreed to by the client, make a friendly phone call. Start with the secretary or office manager (or bookkeeper) to see if your check has been prepared. If not, ask whether it is a good time to talk to the boss. If you speak to the boss, start with some friendly chit-chat: “How’s your family (kids, business, etc.)?” Late in the conversation, casually say, “By the way, I received this month’s work but haven’t received payment for last month. Would you be able to mail it out today?” Chances are they will be embarrassed or apologetic.

Alternative: Ask clients to please bring a check when they pick up work, or to drop it off.