For most jobs, billing on completion will have a positive impact on cash flow because:
- The client can see that the invoice relates to the job presented; and
- The value can generally be reconciled to the job when both are presented at the same time.
Compare that to the situation in which an invoice that arrives weeks after the job has been completed: because the perception of value delivered declines over time, the invoice will undoubtedly encounter greater scrutiny from the client.
For larger jobs, interim billing at predetermined points (generally time based) will lower the overall burden of the account on the client and facilitate progressive payment. You will also bring the cash flow forward as clients should start making payments before the job is completed.
The three basic rules of debtor management
- An effective debtor management plan starts with the engagement process: Be clear and outline both your fees and payment expectations. Have multiple options for clients to pay.
- Start early and have a regular follow up process: The most effective time to start your follow up is when the account is just overdue (and by that I mean the next day after the due date). Make the first follow up a simple letter – a gentle reminder is less confrontational than a phone call. Back up the first letter with a second. Pick up the phone only when first two letters fail to deliver an outcome.
- Set aside the right amount of time each week to do the follow up: Always start with the “just overdue” – they are more likely to pay when reminded. When making the call, try to ascertain the reason for non-payment. Delegate the initial follow up process to the administration team – they will be more effective.
Determining why your clients don’t pay on time
Determining the “why” when your clients don’t pay on time can reveal where and how you need to improve your internal processes in order to improve cash flow.
It is commonly accepted that there are six reasons why clients do not pay on time:
- They have a genuine dispute: If you start your follow up process early, you have a better chance of resolving the dispute and getting paid. Use the dispute to review how you do things and implement changes so as to avoid the same issues arising in the future.
- They are careless or forgetful: Quite often, the reason for non-payment is that the client is busy or under resourced. A timely reminder letter will get the account paid (and this situation presents a great opportunity for you to provide some advisory support).
- They are disorganised: Often we assume our client’s internal processes are efficient and in order. Very often, however, the accounts get put to one side when received in the mail. If your invoice is between the cover letter and the accounts, it won’t be seen. When sending work to clients by mail, place the invoice on top so it can be seen when the envelope is opened; when sending via email, send a copy of the invoice to the accounts manager.
- The client has no money – or not enough to pay the account: if you start early you are better placed to offer a payment arrangement. For larger jobs, breaking down the invoice into smaller amounts and billing progressively has the same effect as a payment arrangement, except that it begins earlier in the process (and means you get paid earlier).
- The client is unconcerned: Ask your clients: are they unconcerned because you took so long to do the work? Focusing on job completion and job turn-around is your responsibility – paying on time is then the client’s obligation.
- The client is dishonest: Interviews, scoping, budgets, formal engagements and interim billing may alert you to this kind of client, but often it’s when the account hits 120 days that you suspect that they had no intention of paying. Start early with the follow up process and, when you have exhausted your standard process or the client is frustrating the collection, call in the experts. A good follow up system followed diligently should result in only the most distressed or difficult clients going beyond 90 days.
Creating and maintaining consistent cash flow in an accounting business permeates every aspect of your work, from the initial engagement process to following up accounts as soon as they become overdue.
Each stage of the job cycle contributes a few percent to the efficiency of your debtor collections. Agree the work and the fee with the client, complete the work on time and correctly, an issue your account in a timely manner. Follow these steps and the greater majority of your clients will be thrilled to pay your accounts on time, every time.
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- Linking sound debtor management to improved cash flow - 23 April 2015