The reality is that businesses fail, not because of a lack of profitability but due to a lack of cash. It is entirely possible to show a trading profit, with charges to clients exceeding the salaries and overheads, but a firm’s outgoings, such as monthly staff salaries or quarterly rents, are normally more predictable and regular than its incomings.
A key question to address is “does the pattern of cash inflows meet the pattern of cash outflows”? Where it does not, obtaining finance to bridge the gap can be particularly challenging in the present economic climate, so practices should be doing all they can to improve income flows.
Acceptance of client instructions
It is tempting, especially in difficult times, to accept all instructions offered. Yet, if the ultimate aim is to convert the instruction into cash, taking on a new client without checking whether that client will be able to pay the bills delivered jeopardises the very aim at the earliest possible opportunity. Robust client acceptance processes – asking the right questions – are essential.
Where has the introduction come from? Has the client approached you cold? Could taking on that client jeopardise your relationship with other existing clients or your potential to engage new clients? Does the practice have the necessary expertise to carry out the work?
Agreement of terms
The second element of the acceptance process also provides the first opportunity to lose money, namely by underquoting. Of course, there is competitive pressure, but getting it wrong at this stage can provide plenty of long-term pain.
When agreeing terms, there is an opportunity to introduce greater certainty into the income flow. Will the work be on a straight time-basis, fixed-fee or contingent-fee basis? By their very nature, contingent-fee arrangements are likely to decrease the predictability of the income stream rather than increase it, and whether or not to accept the appointment should be considered very carefully. After all, staff salaries and overheads are not contingent.
Finally, in agreeing terms, it is good to try to arrange not only billing patterns but also payment plans. If these are included in the terms of business, it is much harder for the client to resist the bills that are delivered. Agreeing the quantum and timing of bills in advance can make it easier for your clients’ cash management too.
Performing the work
Now we have the second opportunity to lose money. Professional practices at their heart are people-businesses and it is their time that is being sold. This is not just true when assignments are charged on a time-basis – that is just a mechanism for agreeing a value for the work – so it is important to understand how long partners and staff are spending on client assignments.
Experience tells us, though, that in the majority of circumstances, we do not actually record all the time we spend dealing with client’s affairs. Very few of us turn off our brains when we turn off the light as we leave the office and we will continue to think about client matters when we are travelling into the office, at home (supposedly relaxing) and at various other times. It can be at these times when we have the “eureka” moment, but how often do we record that extra time we have spent finding solutions for our clients?
Billing the client
What should be one of the most satisfying aspects of being a partner in professional practice can often become difficult and deeply unsatisfying. The reason, normally, is down to an expectation gap.
One issue that causes problems is when advisers react speedily and efficiently to provide clients with solutions but delay in billing for that work. By the time the bill arrives, the client has forgotten how worried they were and how grateful they were when provided with the solution. The best time to bill in these circumstances is as soon as the advice is delivered and the client is feeling relieved.
From a management perspective, it is important to understand the recoveries that are being achieved on bills; in other words for every pound in work in progress, how much is being billed to the client. If there is £10,000 in work in progress and the client is billed £9,000, then the recovery percentage is 90 per cent. On the face of it, this may be acceptable, but the situation is less clear if there is significant under-recorded time. Even if all the time is recorded, there is often a temptation to second-guess what the client’s expectations are and end up underbilling.
Collecting the cash
This is arguably the most important element of the revenue cycle, but one that can often be ignored by partners.
Although most firms will have a dedicated person or team dealing with credit control, the primary relationship with clients is through the partner and they must take some responsibility in ensuring that the bills are paid. They will need to make sure they are aware of which clients have bills that are overdue and the extent to which there has already been communication with them. Finally, management needs to play its part by providing the impetus and focus for partners to concentrate on this area of the working capital cycle.
Steve Gale is an audit partner in the professional practices group at Horwath Clark Whitehill