Why Do We Have Problems With Cash Flow?

Jun 10, 1999

You start your A/E/P or environmental firm with a great business plan. Your marketing strategy pays off and you get lots of projects. Your recruitment approach works and qualified employees are lined up at your door. Your project management systems allow you to do high quality work efficiently and profitably. Everything is coming up roses! But wait, there’s a fly in the soup. All those profits are paper profits. Not enough money is coming in to pay the bills. There’s only so long you can stave off the creditors. The great staff has to be laid off. The electricity just got shut off. The oxygen is running out. And your subconsultants have formed a lynch mob that is waiting to string you up! Well, you get the idea. You have to have decent cash flow or you go out of business. The average firm in this business has a total collection period (the time it takes to prepare, mail, and get paid for an invoice submitted to a client) in the 80-90 day range. That’s horrible! That means it takes 90 days worth of business in capital to keep going. If you do $12 million a year in volume, you’re talking about $3 million in capital. So, why do we have cash flow problems? Here are some of the reasons, as illustrated by statistics from the most recently published Zweig White & Associates, Inc. surveys: The median firm gets a retainer only 2% of the time. Ask and you shall receive. Shaky clients, new clients, clients that fit into high risk categories such as single family residential developers should all be expected to pay money up front. And if they don’t want to pay it, ask yourself why you should be working for them. It takes an average of five days to prepare an invoice. Too long! Get organized. Put some heat on the accounting department. Don’t let your PMs sit on this stuff forever, either. The faster the bills go out the door, the sooner you get paid. 79% of firms do draft invoices as a first step. This makes no sense whatsoever. The draft should be a final invoice as well. If it doesn’t need any changes, it can be put in the mail now, instead of waiting another two or three days for the final invoice to come out of accounting (along with those that did need changing). 36% of firms send out all their bills once a month. All this means is that if a job is done on June 2, and the period ends June 30, it will most likely be July 10 before a bill is mailed. We just added 38 days to the total collection period! 34% of firms do not show previously billed but unpaid invoices on subsequent bills. The main reason firms give for this is that clients don’t like seeing the previously billed items on their invoices. We can solve that one by saying, “Pay the bill on time, client, and it won’t show up on your next bill!” 51% of firms show an aging of AR on their invoices. The client thinks, “We’re all right. We are only in the 61-90 day category. Clearly, other clients must take longer than that to pay because there is a 91-120 day category and an 120+ day category.” The average firm waits 60 days to make collection calls. The smart firms call a week or two after the bill goes out to make sure the client has received the invoice and to find out when they plan on paying it. The average firm waits 75 days after the first collection call to turn the client over for collection. This is too long, plain and simple. This whole collection effort needs to get serious at 30 days and really serious at 60. At 75 days, the next step ought to be to turn the account over to an attorney. Less than one-third of firms do any cash flow forecasting! No wonder the owners are surprised at the end of the week with the news that they don’t have enough funds to cover the bills! No excuses here! Clients are unhappy! Clients who expect something they didn’t get, who are waiting for information, or who think they got lousy service will hold up paying your bills. Make sure you find out early whether or not the client is dissatisfied so you can do something about it and get paid for your work! I could go on and on. You don’t need to be a genius to see how you can painlessly shave 20 or 30 days off of your total collection period. Do it. Originally published 6/21/1999

About Zweig Group

Zweig Group, a four-time Inc. 500/5000 honoree, is the premiere authority in AEC management consulting, the go-to source for industry research, and the leading provider of customized learning and training. Zweig Group specializes in four core consulting areas: Talent, Performance, Growth, and Transition, including innovative solutions in mergers and acquisitions, strategic planning, financial management, ownership transition, executive search, business development, valuation, and more. Zweig Group exists to help AEC firms succeed in a competitive marketplace. The firm has offices in Dallas and Fayetteville, Arkansas.