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How to Use the Balance Sheet to Identify Clients

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Excited about getting started with cash flow advisory but not sure which of your clients would best suited for cash flow services? We get it, even if you don’t have a large client list it can be a daunting task. We have talked about how to narrow your client list using industry commonalities. (P.S. Now is a great time: 3 Reasons tax season is a great time time to talk cash flow with your clients)

But what about specific clients? How do you really nail down who you want to bring-up cash flow services with? 

A great place to look is their Balance Sheet. 

 

Rolling the Dice

The balance sheet is where things go to DIE. Ok, that’s a bit dramatic, so what do we mean? 

The balance sheet is a great frame of reference for what has happened in the past, so it’s a quick way of identifying that a client may be in distress (financially at least, I don’t think we are quite ready to add psychological advisory to our services yet). 

Balance sheet signs of distress: 

  • Relying on a Line of Credit: Continually maxing out a line of credit is essentially a term loan in disguise. While there are healthy uses of a line of credit, like purchasing new equipment, they should not exist in perpetuity. 

  • Low Working Capital : There’s no magic ratio here, but a healthy benchmark is 2:1. Keep an eye out for low working capital as it is an indication that a client is trying to deal with cash flow issues. Check out this article on interpreting low working capital, from Investopedia.  

  • Low Cash Reserves: Clients with lower cash reserves are at greater risk of cash flow issues, especially if their receivables are lumpy or seasonal, as we discussed earlier. 

  •  High Long-Term Debt: If a client is consistently going back and adding debt relative to their operations, again, this is a sign that they are dealing with cash flow issues. 

All these signs show that the client is taking on more risk through debt. Anytime that’s the case, they may be dealing with cash flow-related problems. 

Let’s Talk (Cash Flow)

Now we may need to add some (very light) psychological services after all. That’s because a key part of any advisory is dialogue. Accountants are more than the sum of their spreadsheets…right? Yes? Good, me too, just checking. 

Your clients likely aren’t going to come to you saying, “I’m struggling with cash flow.” They likely aren’t even aware of them, and if they do, they probably don’t know how to talk about them. AND even if they do, they may not talk to you as people tend to see bookkeepers and accounts as very siloed. 

You’re much more likely to hear something along the lines of: 

“It’s been a really tough year; I’m not sure how I’m gonna make it.” 

or:

“It’s been a good year, but I’m not sure why my bank account is so low.”

While they aren’t directly stating it, these people are describing issues with their cash flow. 

To Infinity and Beyond

So that’s it, right? Well no, but it's a great start!

Have questions? Reach out at: helpme@takethehelm.app or connect with us on LinkedIn!