Finola McManus looks at continuing to improve cash flow management and how to deal with some common pitfalls.
In the last article we looked at the need to change our processes and improve cash flow.
Include your staff in what you are doing. In order to agree fixed fees you will have to prepare accurate budgets on compliance work. Budgets must be contingent on the quality of records you expect to receive at the start of the job. Explain to staff this will make their lives less stressful and help them achieve monthly billing targets.
Avoid the common pitfalls of not pricing work correctly and not being able to recover time spent. Agree with staff and clients what the process is when a job is taking longer than budgeted. You need decide if it is due to the fee being inadequate and records not as expected and/or is there a training requirement for the person doing the job? Check that your planning systems are in order and address these areas as soon as possible. Staff should know who to talk to and what to do when they realise there is a budget overrun. Managers should be checking in with staff daily to see if work is going according to plan and supporting when it isn’t.
Clients should never be presented with an unexpected bill after the event. When bills are expected then they are most likely to be paid. Where you perform work outside the scope of the fixed fee; for example, HMRC enquiry, business advisory, questions of whether to buy a new vehicle in the business’ name or personally, ensure you agree upfront with the client how much the fee is likely to be and bill them each month ongoing if it is a project that will run on.
There remains a small number of firms who still bill annually on completion of annual compliance work. This is a very outdated approach which doesn’t help manage cash flow - both for the practice and for the client. Even the smallest of clients prefer to pay a monthly standing order in advance so by the time you come to complete the rump of the annual compliance work you have been paid in full. Many successful firms have direct debits in place and when clients feel confident in what and how they are being charged for it is never a problem.
The most common question is how to decide if work is included within a fixed fee or not - especially where there is a clause of ‘unlimited support’ or similar. Such clauses are often included to encourage clients to have a dialogue with you throughout the year and to build an advisory relationship. Problems can arise when you find yourself spending lots of time on the phone or in meetings and the client thinks this is all included within the fee. Similarly, staff are unclear on when to charge extra for dealing with client calls and emails.
The easiest solution is to avoid such generic clauses in your fee agreement. Insert a clause (agree it with the client) to either a) include a premium fee level to cover ongoing phone and email support. Say you will review how it is working for both of you every quarter and adjust it accordingly, or b) Agree you will always quote for any additional work in advance and the client decides if they want it done or not.
In reality, practitioners don’t want client to think there is a running clock every time they contact their adviser. Clients are invited to call and the practitioner builds in ‘a buffer’ within the fee to cover this. Some clients will be needier than others and overall the fee recovery position balances out - some you win and some you lose. You will be able to identify immediately where there are clients who are using a lot of additional time and need continual support. You will talk to them about agreeing a new fee if appropriate.
As a rule of thumb, if a call from a client means you have to go away, look something up, complete a calculation and get back to them or put something in writing then this work is likely to be in addition to the agreed fixed fee. As long as you explain this to the client they will either say “that’s fine” or “it was only a thought, I don’t want you to spend time on it.” Either way you both win - the client doesn’t get any unexpected bills and you don’t spend time working something out for the client they didn’t really want in the first place.
How to monitor your progress ongoing
Every month as part of your practice management review you should be looking at the following key performance indicators;
Debtors days - these should be within 30 days and reducing rapidly for those old debts you now have a payment plan agreed with the client
Budget v time spent on jobs - review this as part of the finalisation process on jobs
Monthly work in progress/write off review report - every practice management system should produce this data for you
Your review needs to include a follow-up action plan to address the issues and prevent them from recurring.
What if I no longer keep time sheets and following ‘value based billing?’
Firms who have a client base or perform work that lends itself to value based billing will of course have limited need to maintain timesheets.
However, the majority of firms with a compliance-based client portfolio and recurring fees find timesheets a key practice management tool. From an HR point of view timesheets will also allow practitioners to measure investment in training and development, CPD, holidays and illness. These are all key areas to monitor and measure within any firm.
Even if you choose not to keep timesheets the same principles will largely apply, just adapt them to your own particular practice.
Ideally have someone other than yourself chasing payment. Don’t be afraid. Business clients often report they don’t understand why accountants don’t seem to chase money like they have to and assume it is because they don’t need the cash.
Have a systematic process in place including agreed legal action procedures if clients don’t do what is agreed.
What about those slow and bad payers?
Once you have started to review and change your systems with regard cash flow management and ongoing practice management monitoring, you will identify who exactly are the problem clients.
With such clients you have a three options:
Help them improve and become an A or B grade client. Use a client grading system to analyse what makes them a poor grade client for your firm and identify areas where you can manage them up a grade
Factor in a ‘buffer’ to the fixed fee which remunerates you for the ‘trouble factor’
Take a cold hard look at the client. If they dispute fees, never pay on time, never refer new business to you and are generally unpleasant to deal with then sack them. Free up your time and use that time on a client who values you
Some firms keep a list of ‘clients to be sacked’ and share it with their team. Each month the team (including partners) votes on which client to sack. A real morale booster for everyone! The reality is that it helps churn your client base into one that matches your ideal client profile and business plan.
Finally, start the change in thinking now and results will be seen very quickly. Cash flow management underpins so many of the key practice management success drivers. In June I will be looking at how you can measure the progress you have made.