First things first, the importance of a structured process
A structured process followed consistently will deliver consistent results. An unstructured process may well deliver an outstanding result, but over time the results will be significantly less.
Cash flow is tight but profits are good: I am constantly surprised at how many accountants tolerate average debtor days in excess of 30 or 45 days when they insist that their terms of trade are seven or 14 days from the date of invoice.
The accountant’s challenges here are varied: get the productivity right and the work in progress blows out; drive the work in progress down and the write offs spike or debtors blow out, or both. Generating cash from the work in progress report is possible but it is by no means a quick or sustainable fix.
The most common approach taken to fix cash flow problems is to scan the debtors ledger for the large amounts and then make a few calls. Generally we only make a small number of ‘strategic’ calls because that’s all we have time for or because we either have a quick win or get frustrated with the process. Calling debtors to collect money when your own cash flow is tight is desperation at its worst, and your clients will detect it. Success may result, but the time, effort and anxiety of the process will take its toll.
Don’t forget that your cash flow management process is fundamental: make sure it’s efficient
Cash flow management is a process that is intertwined with every aspect of your business, from the initial client contact to ‘banking the cheque’. Yet so many firms start the process at the debtors ledger or, when that doesn’t work or if they have a little more foresight, by billing aggressively from the work in progress report.
Strong cash flow management results from the accumulation of:
1. Understanding the client’s needs and business objectives;
2. Budgeting and estimating, including value based assessments;
3. Engaging the client;
4. Efficient and standardised production processes;
5. Effective workflow management;
6. Effective work in progress protocols;
7. Regular and effective communication with clients;
8. Billing protocols that are both periodic and on completion;
9. Debtor follow-up processes that are consistently applied; and
10. Having a clear understanding of why your clients don’t pay on time.
Items 1 to 4 are the core processes that will set up the client engagement and determine if the job will be profitable from the outset. But when the work is coming in faster than it is going out, priorities are changing daily and everyone is working a full quota of hours – the last thing on your mind is redefining budgets, engagements and production procedures. However, it is critical that cash flow be fixed or improved quickly – and the fix needs to be sustainable.
So now we reach your first method to accelerating cash flow.
1. Effective workflow management can improve cash flow
A common scenario for practices with poor cash flow is this: productivity is high and, as a result, the work in progress is steadily growing; everyone is fully engaged on client work but very few jobs are actually being completed or billed. Improving the way workflow is managed in your practice can be key to improving cash flow.
When it comes to workflow, the top time wasters are:
1. Missing information;
2. Non-responsive clients;
3. Job pick up and put down;
4. Changing priorities;
5. No budget, inadequate budget or no monitoring process; and
6. Inadequate capacity planning.
By identifying the source of your workflow issues, you can turn your mind to the appropriate action to improve cash flow.
Identifying solutions by reviewing work in progress reports
Appropriate solutions to workflow management problems can be identified by reviewing the aged work in progress report:
1. Look for clients that have values in a single column other than ‘current’: The jobs relating to these clients have been put down as the team have moved to other projects, or have been finished but not yet billed. The appropriate action here is to reschedule the jobs with the responsible team member and set a new due date for completion.
2. Looking for clients that have values in multiple columns: The jobs relating to these clients are being consistently picked up and put down. Ask yourself: are you waiting on information; is the scope changing; or are you just failing to focus long enough on the job to finish it? The appropriate action here is to set particular milestones with the client that, when achieved, invoices will be raised. Treat each milestone as a new job with a budget and due date.
3. Looking for clients which have a large amount in a single column followed by smaller amounts in subsequent columns: Ask yourself: have you completed the bulk of the job but are waiting on one or two queries to complete; have you followed up on the information; is the client responding; and should you bill it anyway? The appropriate action here is to implement a follow-up protocol that includes issuing an invoice when the client has not provided the information within a reasonable time frame. Forward the invoice with a covering letter stating that the account is for work completed to date and that the job will be completed when the queries have been answered.
Assessing job allocation amongst team members
Next, you should look at your team member job allocations.
In most firms we expect a fully productive team member to deliver 30 billable hours per week. For any team member, take a look at how many jobs they have committed to completing this week – do the budgeted hours equate to the 30 productive hours you are expecting? Possible scenarios and recommended courses of actions include:
1. Budgeted hours on jobs committed this week are less than 30: Identify and allocate additional jobs to this team member. Without appropriate action, the time to complete the jobs will expand to fill the time available, resulting in budget excesses and write offs.
2. Budgeted hours on jobs committed this week are greater than 30: Take a reality check and prioritise or reallocate jobs. Whilst a conscientious team member will endeavour to complete all jobs they have committed to, in order to keep things moving they will jump from one job to the next as soon as an obstacle is encountered – the outcome being that very little gets finished.
3. There are no plans for a specific set of jobs to be completed; they all have deadlines and team members just work through them in order: Typically, if you set a target for a team member, they will do their best to achieve it. If their target is productivity alone, then that is all that they are committed to achieving. If you instead set them a target to complete a reasonable budget of specific jobs, they will achieve that target and, by default, deliver on their productivity expectations.
The outcome from reviewing work in progress and workflow in this way should be an increase in job completion. Now all you need to do to improve cash flow is get the invoices out and let your debtor follow-up process take care of the slow payers.
Bruce Coombes is the founder and Managing Director of QuickFee, and having been in practice for over 15 years, personally felt the need for a payment option that is easy for clients to access and equally easy for an accounting firm to offer. Bruce was also the pioneer of outsourcing in Australia, starting from scratch and ultimately selling to a listed public company in 2010.