This is Ridiculous!
Dec 03, 2007
I am getting really tired of principals (and, in some cases, finance and accounting people) telling me that there’s no way they can do better than a 96-day, 105-day, or 119-day average collection period (ACP) in their A/E/P or environmental firm. The thought that this kind of ridiculously slow payment practice is normal or acceptable is just plain RIDICULOUS.
I say this because I have seen many companies do so much better— companies with the exact same client profiles as some of those with ridiculously long ACPs. And I have helped some of these firms get there (to a much lower average collection period). But ONE thing makes them different from those with long ACPs— they have a collection process and they DO what they are supposed to do EVERY single time. Everyone else makes excuses for why they aren’t following the process.
Bad cash flow can ruin you. You can be profitable on paper and run out of cash and credit and be put out of business. I also don’t understand why anyone would let their money be at risk like it is when it’s sitting in old accounts receivable (AR). The longer it sits out there, the less likely you are to collect it— ever! So it seems obvious to me that if ACP needs to go way down, this should be management’s primary focus.
Even though I’ve probably said it all before, some people still haven’t got it. There are five primary points I want to get across about how to greatly reduce average collection period:
It starts with project initiation. If you allow people in your firm to get a job number they can bill time to without having a written contract and other project initiation information entered into your system, you are crazy! A good chunk of old AR is always from clients who didn’t know (or claim they didn’t know) that they have the design or environmental firm working on a project. Make sure you don’t do work that your client never intends to pay for or will attempt to weasel out of paying for if they can. Have some kind of contract, work order, or something that is a record of the conversation authorizing you to work and acknowledging your billing method and schedule.
Finance and accounting has to lead the collection effort. I have said this for so long that I can’t believe anyone in this business still thinks collection is the primary responsibility of the project manager. Listen to me, readers! Some PMs will NEVER see collecting ARs as their primary job. They don’t want to get cross-wise with their client. And besides, they have “better” things to do! When you assign the job to F&A in most companies, it will get done. They see collection as part of their role. And they will follow your process religiously, whereas a PM will always have what seems like a legitimate excuse.
The call at seven days is THE most critical step. Seven days after the bill goes out, someone from the firm (preferably, accounting) needs to call the client and see if the bill has been received and, if so, when the client plans to pay it. This call alone will cut days, and perhaps even weeks off your collection period. Why wait 60 or 90 days for the client to say, “What bill?”
Statements are a waste of time. NO ONE PAYS STATEMENTS! Again, I must sound like one of those annoying, talking, animatronics dolls they sell at Walgreens on this one because I keep repeating myself. But the bottom line is, you are wasting your time and money sending out statements as no one pays a statement. They pay invoices. And invoices should always reflect previous invoices that are still unpaid in the “Total Due and Payable” line that is bold and double underlined. Clients who gripe about this billing practice should be told (nicely, of course) to pay their bills per their contract and that this would never happen again if they did so.
It should take an act of God to stop the process. You cannot let the firm founder, president, office manager, or some other principal stop the collection process under just about any circumstance. Every step should be followed every time.
I predicted a slowdown was coming back in the September 10, 2007, issue of The Zweig Letter (Issue 728, “Think recurring revenue”). It’s here now. And you can already see the effects of a slowing economy in the longer average collection periods. Don’t be a banker and don’t be a victim. Be a smart businessperson who acts like someone who understands how critical good cash flow is to the value and ongoing viability of your business.
Originally published 12/03/2007
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