Improving Your Firm’s Lock Up & Cashflow

Managing a firm’s lock up and cashflow often varies across the profession depending on profitability, practice structure and size, desired salaries or drawings, profit distributions, external funding sources and even the desire to manage the payment of tax. However, pleasingly we have been noticing some gradual improvements in the average WIP and debtor days being reported across most regions within Australia. There are some exceptions, and as we vet the raw data provided by individual firms, we do notice the occasional outlier, but all in all, these results are generally heading in a positive direction.

However, we are aware that firms may have been more lenient on chasing outstanding fees or delaying their standard billing practices due to the events of the last couple of years, with some reporting clients simply weren’t in a position to pay. Whilst that may be particularly understanding of the firms, with some clients yet to recover or get back on their feet, we implore firms to desist such practices as much as possible. There will generally always be one or two clients that a firm feels obliged to help by delaying invoicing or writing off fees, however, there comes a time when this has to stop. There is no point continuing to service a client that can’t afford to pay for the services already provided. It benefits no-one, not the firm, nor the client.

One way to work towards resolving this is implement a payment program. Please keep these short with regular payments. At times, the best incentive to have a client pay off an outstanding invoice or sums is to stop or limit the work that will be continued until the original sums are squared away.

Furthermore, establishing periodic payments, whether these be formal and informal, and there are systems and programs to assist with this, appears to really be benefiting both WIP and debtors. Many firms I speak to now have these in place for most, or all, of their clients, although some still struggle having these conversations with their more long standing clients that are used to a bill once a year at the completion of their work. For me, I love paying my accounting fees monthly, it takes all the angst out of paying these fees in one lump sum at the end of the year and really benefits cashflow planning.

Another factor that we need to be mindful of when allowing extended payment terms are interest rates. More recently, firms haven’t worried about sourcing external funding to assist with cashflow or allow clients to have extended payment terms given the lower interest rates, but with these on the rise, now is the time to rein this back in. A firm is not a bank, it is not its responsibility to fund clients’ fees, and as rates rise, this may place even greater pressure on some clients’ ability to pay their fees.

There are very few firms that I speak with that don’t tell me that they have certain types of clients who have a more relaxed or restrictive approach to paying their invoices. Whether these be farmers, or certain cultural/ethnic groups, or older long standing clients, every firm has these types of clients that just won’t fall into line with the firm’s desired payment terms. Once this pattern is allowed for a period of time, it becomes gospel for such groups and there is just no budging or moving them. So, whilst the following approach may help, I would certainly encourage firms with such clients to set strong procedures with new clients to avoid such patterns forming and limit the number of clients that fail to follow reasonable payment terms. If is comes to providing special services for these types of clients, strongly consider either part or full upfront payment of these particular fees.

Perhaps lastly, we see it everywhere, as part of gas or electricity bills, as part of fee agreements with various professionals, if the payment of an invoice or bill is late, the payee may incur late fees, so this could be something that could be factored into your firm’s client invoices. Now some may say such an approach is rather harsh, and perhaps so, thus this may be an approach that is applied to a firm’s worst offenders and will not doubt require clear notification. Or you could otherwise apply what is call the pain premium, by adding a premium to the cost of your services to allow for the pain of having to wait to get paid. Alternatively, and perhaps in a more positive light, the firm could implement a strong and systematic debtor collection process, should this be the problem area. Most firms have an excellent administrative person that is great at proactively and successfully chasing outstanding debtors.

Regardless, keep up the great work in this area, this is a key area of improvement that we are currently monitoring through our benchmarking services such as our June and December Charge Rates & Salaries Reports.