According to recent feedback from firms, debtor/receivable days are on the increase with a knock on impact on firm lock up (debtors and WIP at realisable value).
With the pandemic maybe going into its final stages (no one really knows for sure), liquidity in many countries has tightened. There has been a seemingly endless stream of business closures and a prevailing air of uncertainty in almost every sector. The professions are feeling the impact of the economic downturn even though some have seen increased profits.
Current accounting firm surveys reveal that the average lock is 120 days – and in 2021 and the first few months of 2022 many have seen ‘investment’ in working capital increase.
TAMING THE LION
How can you tame the lion of lock up so that it becomes more like a shrew? Our role includes giving business advice to clients, but like the cobbler of old how well do we manage our own key assets?
Some, or at least those participating in surveys, fare better than others, many of whom have lock up of more than 150 days. The good news is that there is considerable room for improvement. How much cash would you generate if you reduced your lock up by fifteen percent? What additional services would you be able to offer if you did not have a backlog of unbilled work or outstanding bills?
STRATEGIES FOR REDUCING LOCK UP
How can you improve your work practices and reduce lock up? The first stage is to determine what your optimum lock up level should be and make a firm-wide commitment to attain and maintain it.
Whatever your present lock up, I suggest you target a minimum reduction of ten to fifteen percent in the next six months. Once you have set your target, what steps can you take to achieve it?
Assess the following strategies to see how they might help your accountancy business:
1 Focus on client communication
Make sure clients do not receive bills that are outside of their expectations – and ensure they know that payment is expected within thirty days – or less.
2 Lock up credit limits
Do you have a lock up limit for each client? It is important to establish and implement credit procedures that take into account your total lock up exposure. Decide on a limit and do not go beyond it.
3 Improve timing of billing
- If twenty percent of the projected fee is already in the WIP ledger before the main work commences, send the client an interim bill. This will probably cover tax and advisory work for the previous three months or so.
- During the main work, agree a payment progress timetable, including a payment in advance, with the client so that WIP is maintained at as low a level as possible. It is important to focus on payments, not just invoices, otherwise you might find you complete a job only to find that the invoices remain unpaid (while the client has recovered the sales tax)!
- Bill progressively to avoid a WIP build up that intimidates you or the client. Clients generally prefer three invoices for one third rather than one at the end of the job. A large invoice at the end on completion can invite a renegotiation of the fee.
4 Compress elapsed time
Because many firms raise bills at the conclusion of the work, it is important to compress the elapsed time of the engagement as much as you possibly can. The sooner the work is finished, the sooner you are paid.
Total firm WIP should not exceed ten percent of gross fees. What can you do to reduce the elapsed time from start to finish? What has to be done to make the work a 100 metre sprint rather than a 26 mile marathon?
5 Bill promptly
If you bill promptly:
- You will bill more often, which among other things means both you and your client can remember what you have done
- You avoid your WIP depreciating. Typically the billable value of WIP reduces by two percent a month
- You bill while the tears of appreciation are still moist in the clients’ eyes. Clients are much happier to pay for services just rendered than they are for those long forgotten!
6 Let your staff do the billing
Allow employees to draft invoices for compliance work. Of course, firm owners should approve all invoices, but having staff prepare them trains them for taking on greater responsibilities in the future. Moreover, staff are more likely to remember any extra services that were requested and authorised by the client. This strategy also helps to promote cost-consciousness and efficiency.
7 Watch your KPIs
Like an untamed lion, lock up can resist all attempts to be managed because no sooner do you bill than more time is added to the system. That’s why it is important to have measurable indicators and a reliable process for monitoring them.
In my next blog we will take a look at further strategies for WIP reduction.