Is it that the economy has uncovered poor practice regarding cash flow, or that the economy has made clients worse at paying on time? It doesn’t really matter! What I do know is that professionals do suffer cash flow problems – even though it takes a while before they’ll admit it. So “How to improve cash flow” is not something one gets asked….sometimes until too late.
Fundamentals of cash flow
Do work bill get paid.
Well, that was really simple. The problems exist where the gaps are in that sentence.
Let’s look at the common problem areas.
How to improve cash flow: WIP
Work in progress is invoices that haven’t yet been raised, and the longer they sit around – the greater the likelihood of the client saying “No”, or at least querying the amount.
Why does this seem to happen in professional practices? I’m often told that the problem is to do with “extras”. If that’s the case get agreement to proceed beforehand and invoice as soon as the extra is complete.
In reality I think the problem is more to do with flawed thinking on behalf of the practice owner. There seems to be an assumption that these extras are only small little bits, so have lower priority than doing other chargeable work.
So, the answer to how to improve cash flow becomes “What helps to bill more regularly and ensure WIP is kept to a minimum”? Different thinking may be required, and that is often hard. Can you get somebody else to do it, or a better process?
How to improve cash flow: Debts
Clients receive their service and are sent the bill (although sometimes it takes a month or two to raise it!).
When clients get round to paying can cause problems too. How to improve cash flow depends on how good the firm is at chasing the debt!
Two things I’ve seen work well:
- Outsource the chasing to somebody else – perhaps even “just” a VA. Being outside of the firm it makes it easier to keep a focus and to politely remind the debtor.
- Regular payments: Why do more professionals not bill monthly? “AH, but the work varies some years”, so bill monthly for the portion of the work that is standard. The majority of accounting work is for small businesses, which have “standard” accounts. What’s so hard in saying we’ll set up monthly payments?
How to improve cash flow: 5 tips
- WIP: Invoice as soon as job is complete. Don’t fall into the trap of thinking it’s just a couple of extras, many accountants do!
- Outstanding debts: Get somebody specific (possibly outside of the firm) to be responsible for chasing, once you’ve given them a clear procedure.
- Monthly payment: Ask clients to pay in monthly instalments (via Direct Debit), cash flow problem goes away.
- Selling in Monthly payments: “If you pay monthly there are no increases in fees this year”
- Visibility: Lastly (and perhaps because I’m a coach), I’d recommend having clearly visible KPIs. Every practice I know that implements clear KPIs find it really helpful and it gives appropriate focus. Click here for more about KPIs or download a free report “what are KPIs and to use them” , it's free and waiting for you to download right now. Click here for instant access (email address required).
How do you answer the question “how to improve cash flow”?