Allowing late payments because ‘this is the way the client has always paid us’ is a cash-flow killer.

Accounts receivable is, for most of our clients, the source of all the cash that fuels the firms operation. The timely collection of AR is a critical component of the cash flow machine for the firm. The CFO, controller, business manager, and financial team spend a good deal of time projecting, reviewing, and collecting the funds that drive the firm. And project principals and managers are called on to update the status of outstanding AR. Some firms even have a dedicated AR collection staff member, whose only function is to manage the collection effort and AR. There is a large amount of time and effort devoted to collecting the firm’s funds. One of the biggest issues that firms encounter is “AR drift.” AR drift is the gradual lengthening of the days outstanding – from 30 to 60 to 90 days and beyond – for the same client or clients. Work continues, the client does not pay, and there appears to be no consequence to the client, who takes advantage of this, and the firm’s principals and project managers accept that “this is the way this client has always paid us” Sound familiar? If so, it might be time to take a serious look at why this has been allowed to occur and what the broader impacts are to the firm. Contract Terms. Your firm’s contract with the client is the starting point for all issues related to collections. It outlines, from the project kickoff meeting forward, the adherence by your principal in charge and project managers to the terms that govern how your firm will manage the AR process. Your client hired your firm for superior qualifications, expertise, and value. Your contract, which establishes the ground rules for performance, allows your firm to provide those services, and you are authorized under its terms to invoice and be paid by the client. The AIA has established “pay upon receipt” as standard language, other contracts specify payment 30 days after invoice date, and your contracts have your unique terms and conditions. Why are you not holding your clients to the terms of the contract? More importantly, does your contract have terms and conditions that govern the invoicing, collection and suspension of work for non-payment? By not providing a sound business approach and adherence to the contract terms, your firm runs the risk of fostering and condoning AR drift. Client Communication. Are the firm’s project managers practicing effective client communication? A weekly short email that informs the client of progress on the project and delineates completion of milestone goals is a critical component of effective cash-flow management. If the PM sends out a weekly status report, the firm’s invoice is less likely to receive scrutiny by the client, who has been informed of the progress of the project. The invoice will most likely be paid faster, and this will break the AR drift cycle. Collection Policy. Does your firm have a collection policy that is adhered to and written down? Do the PIC, project manager, and accounting department all adhere to the terms of the policy? Here is a guide, though other factors – such as prime versus non-prime contract agreements and specific unique contract terms – should be taken into account. The following policy is based on payment upon receipt:

• Five days after invoicing: Accounting emails client to confirm receipt and ask when payment can be expected.
• If payment arrives as scheduled, no further action, if not:
• 35 days: Accounting calls client to ascertain the payment status, if no acceptable answer, accounting contacts PM.
• 35-37 days: PM contacts client PM to determine issues.
• If corrected and payment is received, no further action, if not:
• 40 Days: Your PIC calls the client PIC to determine the issues, and if resolution will result in payment. The date of payment and amount should be confirmed by PIC and communicated to PM and accounting team. No other response is going to aid in establishing payment. Statements from the client such as: “Payment is forthcoming; we will get it out to you” are meaningless without disclosing when and how much! ​
• 45 days: If no payment received, the PIC calls the client and stops work until payment is resolved.

Clearly, the best way to ensure that cash will flow is having expectations clearly defined up-front at the start of the project. One further way to avoid this is the review and approval of a project cash flow with the client. The cash flow mirrors the deliverable schedule, shows the client that you are concerned about the organization’s resources, and will allow the financial team to have a much more predictive way to manage the flow of funds on the project. Adherence to the collection policy will also break the AR drift cycle. Monitoring the Average Collection Period. The critical metric that assesses collection performance is the average collection period. This metric should be reviewed for the firm, office, line of business, PIC, and PM. An annual review of ACP compares the outstanding accounts receivable, divided by the gross revenue over 365. For example:

• Annual AR = $ 3,600,000
• Gross Revenue = $ 11,500,000
• ACP = $3,600,000/($11,500,000/365)
• ACP = 114 days
• The ACP can be reviewed by month, accounting for the period being reviewed:
• March AR = $ 1,950,000
• March Gross Revenue = $ 3,600,000
• Days through March = 90
• ACP = $ 1,950,000/($3,600,000/90)
• ACP = 48.75 days

Zweig Group publishes annual metrics that address the ACP in its Financial Performance Survey of A/E/P & Environmental Consulting Firms. Based on the 2014 Survey, the mean ACP was 72 days outstanding. How does your firm compare? Comparisons of AR outstanding by PIC and PM are some of the most effective tools that a firm can employ in reviewing, assessing, and monitoring cash flow in the firm. Collaborative and cooperative review of the AR by the financial team and the project team will go a long way to improving the cash flow performance of your firm. By consistent monitoring, the ACP review will aid in identifying where AR drift is occurring. Your Banking Relationship. Those of you that manage the banking relationship, line of credit and loans with the bank know that your firm’s accounts receivable is normally the primary asset that the bank will review on a consistent basis. Most banks tie the line of credit and loan values to the age of your accounts receivable. Your firms’ loan ability is directly tied to the firms’ performance on collections. Any AR over 90 days is normally deleted in the analysis of the loan or line values. Some banks will assess loan ability at 80 percent of the total AR. Others review the client-percent of total; any client over 25 percent is eliminated. Others look at AR that is 30 or 60 days, and where there is 90 day AR, the bank reduces the 30- and 60-day amounts by 50 percent! By allowing the clients to drift, you risk putting the firm’s access to cash at risk for both the short- and long-term. AR drift does not have to be the norm for your firm. Effective client, project, and financial management are the keys to breaking the cycle. Ted Maziejka is a Zweig Group financial and management consultant. Contact him at tmaziejka@zweiggroup.com. © Copyright 2015. Zweig Group. All rights reserved.