Is it time to manage your receivables like a real business?
It never ceases to amaze me how lax many small and midsized CPA firms are when it comes to managing their work-in-process and accounts receivable and optimizing their cash flows.
Sloppy billing and collecting policies often result in lost billing opportunities and the need to have a relatively large line of credit. If you don’t bill on a timely basis, clients forget the value you provided and resist receiving a bill 90 days after the work was performed. Sloppy policies also result in year-end fire drills with clients when partners “beg” clients for cash before the end of the firm’s fiscal year end. I often wonder what clients must think of their CPA firm if the partner, year in and year out, is lax about billing and collecting until the calendar hits December 31. I bet they don’t think the partner is a very good business person.
Why are sloppy billing and collecting policies tolerated at so many firms? My sense is that many firms lack the leadership, discipline and accountability to drive improved performance. Particularly at larger firms, many partners view themselves as employees (not partners) and don’t take a real interest in improving firm performance. After all, what’s in it for them?
Having said that, this malaise can be effectively dealt with, and work-in-process and accounts receivable performance can be dramatically improved. It requires persistence and consistency by the firm’s leadership and the ability to pull the trigger when dealing with noncompliant partners.
Here’s how one firm addressed the quest for better receivables management. It instituted a policy that requires as close to $0 investment in unbilled time as possible. This requires that every month, time on each client be either billed or written off (or some combination thereof). Exceptions to firm policy are granted when the circumstances make sense to do so.
The firm instituted a policy that requires that all accounts receivable be collected within 60 days of billing. Again, exceptions to firm policy are granted when the circumstances make sense.
If a partner is unable to substantially comply with the billing and collecting policies outlined above, that partner will meet with the firm’s managing partner (or a designee) to explain why compliance isn’t being achieved. Sometimes the explanation makes sense, but in many cases the explanation is an excuse for not trying. If the partner is a repeat offender of these policies (and the reasons for noncompliance are unacceptable), the firm withholds that partner’s monthly draw until the noncompliance is corrected. Noncompliant partners will usually modify their behavior for a few months but can easily fall back into unacceptable behavior if they’re not carefully monitored.
The proof is in the pudding. At this particular firm, performance improved dramatically. Work-in-process amounts over 60 days old have dropped by 25 percent and accounts receivable amounts over 60 days old have dropped by about 20 percent. On top of that, the firm’s dependence on a sizeable line of credit has diminished considerably. All good. And by the way, once the word gets out that firm leadership is serious about compliance with billing and collecting policies, the partner group generally pays attention and the behavior changes take place throughout the partnership.
This particular firm has become a stellar performer when it comes to billing and collecting, but many other firms have adopted similar policies and seen the fruit of their labors. So, it can be done if one has the conviction to improve.
You may believe your firm can never implement policies similar to those outlined above. For example, your tax-only clients may be used to paying what is owed after the tax returns have been delivered, and some attest clients might be traditionally slow payers. Perhaps you think things can never change with those clients and are afraid that if you pushed too hard, they would take their work to a different CPA firm.
Don’t make excuses. The world of business has changed. There is little doubt that your best clients themselves have tightened up their own billing and collecting policies. You lose nothing by going to your existing clients and telling them your firm needs to tighten up billing and collecting. See what happens. Some clients will balk and perhaps they are understandable exceptions to your new policies. Others might balk, and their inability to improve may be a good reason for you to exit from those client relationships. However, many clients will understand your logic and not balk. Many will do their best to comply with your new policies. Moving forward, all your new clients should be told about your tighter billing and collecting policies upfront when your relationship with them begins. Compliance by new clients is considerably easier than compliance by existing clients. They have not been spoiled by your previous lax practices.
Oftentimes CPA firm partners forget their firm is a business. It has to run like a business. Profits and cash flow are the lifeblood of any firm, yet performance may be nowhere where it needs to be. Take a hard look at your receivables management. I’m guessing there is considerable room for improvement. If so, tighten up your policies.
If your partners see this is important to you, it will become more important to them. Compliance with policies is contagious. Partners want to win but need to know the firm’s leadership is applying tighter policies in a consistent manner. Most important, they need to see that the firm’s leadership is prepared to pull the trigger when noncompliance is inexcusable.