By Bruce Coombes, QuickFee
Linking sound debtor management to improved cash flow
For most jobs, billing on completion will have a positive impact on cash flow because:
1. The client can see that the invoice relates to the job presented;
2. 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
1. 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.
2. 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.
3. Set aside the right amount of time each week to do the follow-up: Always start with the ‘just overdues’ – they are more likely to pay when reminded or let you know why they are holding out. 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:
1. 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.
2. They are careless or forgetful: Quite often, the reason for non-payment is that the client is busy or underresourced. A timely reminder letter will get the account paid (and this situation presents a great opportunity for you to provide some advisory support).
3. They are disorganised: Often we assume our clients’ 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.
4. 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).
5. 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 turnaround is your responsibility – paying on time is then the client’s obligation.
6. 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 those clients with payment arrangements going beyond 90 days.
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.