Do your accounts and bank statements show a widening gulf between your billings and what clients have actually paid? Even if that gap isn’t widening, it’s frustrating and stopping you from spending some of your hard earned income. After all, there is nothing more frustrating that having a 'paper' profit and struggling to get money into your pocket from your firm. It's not just about not getting your cash out of the firm. Limiting your cash flow is one of the biggest barriers to growing your firm.
Here are three tips to cut WIP and reduce lockup in your firm.
Cut your WIP and lockup
The lower your firm’s lockup the quicker your money is available to you. Let’s talk basics first and then examine three tactics that Accountants have used to reduce the lockup in their firm.
There are two things you can do:
- Bill more quickly (cut WIP - work in progress)
- Get paid more quickly (cut lockup)
OK, you know that. But how about this for extra motivation? The lower your firm’s lockup the greater the capital value of your practice!
1: Ensure your clients are never surprised by their bill
You have probably done this at home yourself. I know I have. I get a bill, know I have to pay it, but it arrived earlier than expected, or the amount is different to that which I expected (even if it’s right). What do I do? I genuinely mean to pay the bill, but need to make a phone call, or check my facts. I normally get round to it………eventually.
One common reasons for holdups in clients paying their bill is disputes over the amount. Ensure your client knows the invoice is coming and has already agreed the amount; the bill is more likely to get paid promptly.
I almost hear you saying ‘but they signed the engagement letter, with that information’. Yes, but how many months ago? What could you do to smooth the client’s payment process with information?
Get all your ad-hoc work agreed in writing (together with amount, payment terms and date) means less client surprises. Make a short phone call just before billing, and that nearly always helps the bill get paid more quickly.
2: Monthly billing and direct debit payments
Move your clients onto monthly billing so that you bill by splitting the annual compliance fees into 12 equal monthly installments. Now they're paying up-front and you are smoothing their cash flow (and yours).
Systems like GoCardless or Directli mean getting paid by direct debit is easier than ever. Linking them with your cloud accounting system makes the process easier to manage than when you billed annually! Why muck about with standing orders, or rely on clients generating the monthly payment when you can be in control of what your clients are billed, and when, via direct debit?
The switch-over can be a large job if you have a large client portfolio. It needs planning and thinking about the best way to approach it. However it can reduce your lockup to almost zero, so it's worth doing!
3: Bill more often
Nearly every firm know this makes sense, but few actually get round to it. They've never thought about the size of the prize versus the small amount of changing your processes.
How many pieces of ad-hoc work do you take on? Ad-hoc jobs get missed and not billed for a long time in many firms, often waiting at least a month. How can you adjust your weekly management process to ensure that all completed work has been billed, and all work in progress is actually progressing? This is where you can really cut WIP.
Now consider your terms. You do not have to give clients 30 days to pay. Why not 14 days, or making your payment terms even less?
An alternative is to adopt the parking fine approach, as some firms have. I call it that as I had a parking fine a few months ago; it was dramatically reduced if I paid within 7 days. How much would you discount your ad-hoc bill by, if it were paid promptly?