Get Your Money Faster
Sep 01, 1993
No small company— particularly an architecture, consulting engineering, or environmental consulting firm— can afford to ignore cash flow. Consider that a firm billing $5 million a year in fees can raise $137,000 in operating capital just by taking just ten days off its average collection period! (Divide $5,000,000 by 365, then multiply by 10.)
Most firms with cash flow problems simply neglect to follow the basics of money collection. When called in to help a firm like this, here’s where we look:
Is everyone turning in their time sheets on time? If not, they’re holding up invoice preparation. Principals are without exception the worst offenders here. The rest of the staff just follows suit.
Is accounting getting the time sheets entered to the system quickly? Many firms fail to get their time sheets keyed in a timely fashion simply because the accounting clerks all go home at 5:00 p.m. These people should work weekends and nights if need be to get the time sheets entered. Those who don’t see the value in doing this should go back to the earlier illustration— for a firm with $5,000,000 in annual revenue, one day’s cash flow is worth nearly $15,000!
Are invoices or draft invoices being held up in the review cycle? Too often, invoices sit in someone’s in-box for a week or ten days before they are signed and mailed out. This delay costs money. The review process should be accomplished in no more than two days. If the PIC or PM is not there or too busy to review the bill, then he or she should have a designated representative available to do so.
Are invoices being followed up on in a timely fashion? Fifteen days after the bill goes out, either the PM or PIC should call the client to check if bill was received and has been processed for payment. This is doubly important for new clients who don’t have an established payment history with the firm.
Are all the “automatic” steps for collection being taken? By automatic steps, I mean things such as mailing a photocopy of each unpaid invoice (stamped “copy”) 30 days after the original goes out and sending another photocopy (stamped “past due”) at 60 days. These steps require no involvement whatsoever from the professional or technical staff, and can be handled entirely by the support staff— making it more likely they will actually get done!
Do the P.M.s and P.I.C.s understand the importance of their role in collections? On one occasion, several experienced department heads in a good-sized engineering firm insisted to the president that an increase in professional liability insurance premiums would not affect the firm’s profitability! Since then, I’ve learned not to assume any level of financial understanding when dealing with design professionals. Too many PMs— and even some PICs— do not see the connection between collections and the firm’s ability to stay in business.
I’m often asked the question, “Are collections the responsibility of the PIC/PM or of accounting?” My answer is that they are the responsibility of both. Each has their own role to play. You can’t have a good collection process that produces consistent results without the involvement and cooperation of both parties.
Collection can’t be the sole responsibility of the professional staff. There are times that collection problems result from professionals failing to do what the client expects. In these cases, accounting can identify and bring these problems to management’s attention. Also, accounting can act as the “bad guy” if necessary, allowing the PIC/PM to stay on good terms with the client.
Accounting can’t do it all, either. Sometimes it is absolutely necessary that the PIC or PM get involved when accounting is unable to get the money. The 15 day check call to make sure the bill was received and is being processed is the first step. But if a bill is still unpaid after 60 or 75 days, the PIC will have to get involved again. If a client hasn’t paid after this length of time, you know it’s time to show that you are serious by calling in the heavy hitters.
Practically any firm with a cash flow problem can improve its situation— in some cases dramatically— with just a few simple steps. All it takes is management’s desire and commitment to do something about the problem, and the active participation of both accounting staff and professional/technical staff.
Originally published 9/01/1993
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