If you are seeing your cashflow slowing down and your average collection period rising, you may want to take a look at why that is happening.
As I wrote in these pages a few weeks ago, the prosperity of the AEC industry as a whole has led to individual firms piling on overhead staff and tolerating non-chargeability in people who are supposed to be highly chargeable. It has also resulted in a certain sloppiness as it relates to billing and collection.
If you, in spite of having record revenues and profitability, are seeing your cashflow slowing down and your average collection period rising, you may want to take a look at why that is happening. Here are some of the things I would want to take a look at:
- Speed of billing. Firms that have their stuff together can get their bills out quickly, and at any time someone in the firm needs one. Firms that don’t turn this into a lengthy days-long process will collect their money faster even if it isn’t reflected in the average collection period, which starts once the bill is actually sent. Why some firms have such slow and bureaucratic processes for billing is beyond me. With all of the off-the-shelf systems one can buy today that will handle time and expense reporting, along with billing, there are few excuses for the inability to produce an accurate invoice quickly. Understaffing of the accounting and billing function is one possibility. Another possibility is that management tolerates days to get invoices for job-related expenses or sub consultants to get keyed in, or the firm has a lengthy (and typically unnecessary) time sheet review process. Either way, it will always lead to worse cashflow than the company should have.
- Bad invoices. The invoices themselves have to be clear and formatted correctly, must be consistent with the contract the firm is working under, and should go to the right person in the client organization who has authorization to pay. If any of these are off, collections will slow down. This takes diligence and people in your firm who know what they are doing. It also takes some common sense. No one pays a “statement,” so why ever send those out? I also always thought that agings of prior invoices (“0-30, 31-60, 61-90,” etc.) should never show up on a bill, and a lot of companies still do that today. It just demonstrates to a client that you EXPECT them and your other clients to not pay you promptly. I would much rather show any prior unpaid invoices for a particular project to be reflected on the bill after the total for the current billing period, and to be included in the “total due and payable now” figure at the bottom of the bill. If clients gripe about you doing that, simply tell them to pay their bills promptly and they will never see that again. I’m serious!
- Weak collection efforts. I would define “weak collection efforts” as not following up shortly after a bill is sent to see if it has been received and if there are any questions, not following up after 30 days to see where it (the money) is if it hasn’t been paid, and not getting the technical or design professionals who are running the job involved if it isn’t paid in 45-60 days. These things have to happen consistently or payments will stretch out. It’s all a matter of communicating to the client that whatever they have done in the past as it relates to paying your bills, or whatever other companies they owe money to tolerate from them, is of no concern to you – and that you fully expect to get paid promptly when you send them a bill.
- Internal tracking and communication. You have to track and report the metrics related to billing and collection, and then talk about how you are performing in your regular management meetings. Maybe total collection period is a better metric to track than average collection period, because it starts the moment the work is performed versus when the bill is actually sent. Certainly monitoring your unbilled work-in-progress is crucial, as this money reflects the difference in total collection period versus average collection period. Many firms allow their WIP to build to a completely ridiculous number because their managers allow people to keep charging their time to jobs that are over budget with the idea that some day they may be able to ask the client to pay for some of that. Then they never bill it. This is a bad practice. Either bill it or write it off – quickly in either case – so you don’t distort your accrual revenue numbers.
The bottom line on all of this stuff is that as long as I have been working with firms in this business and as solvable as these kinds of problems are, they still exist. Why not learn and change so when this economy turns down and the music stops, you aren’t left without a chair to sit in?