Getting Paid

Mar 28, 1994

In the past six months, I’ve had the pleasure of working for three firms with very low average collection periods (ACPs). Average collection period is the average number of days it takes a firm to get paid after it mails its invoice to the client. One of these firms had a 39-day ACP, one a 40-day ACP, and one a 47-day ACP, contrasted with the average for the A/E and environmental consulting industry as a whole of 73 days (per Zweig 100 data). Not surprisingly, these firms were also dealing with their work-in-process (WIP) fairly well. Work-in-process, just like ACP, should be minimized. It is work that has been performed, but not yet billed. I find that a lot of design professionals don’t really understand WIP. For example, say someone performs $4000 worth of work on a job in June, but takes until July 15 to bill it. The work would be considered WIP for the time between completion in June until July 15. What are these firms and others with low ACPs and low WIP doing that everyone else isn’t? They have high-speed billing processes. To have a “high-speed billing process,” your bills have to go out quickly. To do that, you can’t be producing multiple drafts for review by everyone under the sun. Nor can you try to do all your bills at the same time each month (we saw that more than once this year). Keep WIP down by billing continually and by putting out final bills as your first drafts. That way, if a bill needs revising before it goes out, you can do it. If not, it can be mailed right away. An extra bonus is that this practice discourages trivial modifications by overly detail-conscious PMs or PICs. They have well-designed invoices. Well-designed invoices are labeled “invoice” at the top. It’s amazing how many firms we see sending out “statements” instead of “invoices.” Then they wonder why they aren’t getting paid! Well-designed invoices are easy to understand. They have a date on them, they have a number, and it’s easy to tell what’s been done and what the total due from the client is. Poorly designed invoices are confusing, contain lots of excess detail, and make it hard to figure out what has been done and what is owed. They sign their invoices and always include a name and phone number of who to call in case of a question. Signing invoices may appear to be in conflict with a “high-speed billing process” but it certainly doesn’t have to be. We sign all our bills here. I travel as much or more than any of our readers; yet our bills go out on time, every time. Because if the firm doesn’t get paid, we won’t get paid. That’s why I will come in at night, over the weekend, or do whatever it takes to get the bills out. A signed bill is important to your client. It shows that you have looked at it, and if they trust you, they will be less likely to question it. The phone number is fundamental so that if there is a question, you can be reached, instead of having your bill sit until you call to check on it. Previously billed, unpaid invoices are listed on all subsequent invoices. This, too, is fundamental to getting paid. Firms with low ACPs almost always do this; firms with high ACPs rarely ever do. The reason most companies give for not doing this is that their clients complain about it. My response to that one is simple: “Pay on schedule and it will never happen!” If you didn’t pay your electric bill, it would show up on your next months’ bill. And I doubt any amount of calling and complaining would get the utility company to change its billing practices! Don’t you be a push-over for slow-paying clients, either. They have consistent collection procedures. Good collection procedures require certain things to happen every time throughout the collection cycle. That means clients routinely get called to be sure an invoice was received and has been processed for payment. That means a copy of any unpaid bill goes back out at 30 days. That means bills not paid in 45 days are followed up with a phone call. It means good records are kept to document all these collection activities. Finally, it means the firm has a limit to how long it is willing to play “banker” for a client that doesn’t pay its bills. And it will get nasty (if necessary) to get paid. They don’t keep a lot of cash in the bank. There’s nothing like a little pressure to perform. Getting excess cash out of the business forces you to collect your money. Too much cash in the bank may take the heat off you when it comes to getting paid, and allow ACP and WIP numbers to float upward. Getting paid is a vital element of good cash management for any A/E/P or environmental firm. Much more is within your control than you will ever realize. Start doing now what it takes to get paid. Originally published 3/28/1994

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