Cash Flow for Professional Service Firms
A Three Part Blog Series
Part One – Understanding Why Professional Firms Aren’t Paid on Time
Nearly 20 years ago a voice boomed at me “We offer both ways to pay”.
I was sitting opposite a BIG man. Big in all respects: large frame, big character and a huge reputation. He had a big office, desk and chair to match. I was sitting on what felt like the floor. A small chair looking up at an accounting industry legend.
I’d just asked him “What payment options do you offer clients?”, and he’d delivered his deadpan “We offer both ways to pay”.
I’m not sure which two options he was referring to when he said “both”, so I sought to clarify with “Direct Credit or Credit Card?”.
“No” he boomed. “My two options are kneecaps intact or broken!”.
We both laughed. It was a great icebreaker to what we both knew was a deep-seated problem his firm had endured for years.
Professional service firms, mainly accountants and lawyers, have always struggled with payments. Let’s be clear though – it’s NOT that your clients don’t ever pay. Clients almost always do pay. The real issue is that so many don’t always pay on time when the invoice is due.
If you’re looking for proof, just check out any of the industry benchmark reports from across NZ and Australia for the last 20 years (see accounting and law industry benchmark examples). While professional firms might commonly offer credit terms of 14 days, the reports show that on average they are paid between 50 – 55 days (debtor days).
If you were an accountant and you had a client that was being paid on average four times slower that they expected, you might have some well-intentioned words of advice.
So why are professionals generally so poor at their own accounts receivable? Under all the symptoms, and side effects there are two main causes:
1. Causation One – Tension Conflict
At university you received detailed training in your chosen field of study. Many years later, you now demonstrate the skills gained with attention to detail, solving complex problems – often within tight deadlines.
You’re a trusted advisor and you relish this type of “task tension”. But that conflicts directly with the “relationship tension” that comes with making, say, a telephone call that might start with “Hey, you know that work I did for you three months ago – when do you think you can pay me?”.
We all prefer to do the things we like, and we train our team members better on things we are good at. Accounting firms are very good examples of being professionally focused on task tension (eg Filing 100% of returns on time) but, well below average at relationship tension tasks (eg Having debtor days over 70).
2. Causation Two – Lack of Priority
As a professional you are likely to be earning good money, have a growing practice and are busy juggling multiple other management priorities. Becoming more efficient with your accounts receivable is probably a relatively low priority. After all, does it really matter if a client pays a little bit late?
Cash flow inefficiencies caused by slow payers only becomes an issue when …well, when it really matters.
Strong, predictable cash flow is like keeping your gutters clean at home. In summer, you choose to spend time at the beach rather than cleaning the gutters – good on you, it doesn’t really matter. That said, when it rains heavily and unexpectedly, and your blocked gutters cause a flood of dirty water through your living area, then it really matters.
On average, smaller firms get paid a little more quickly than medium firms since they can less afford to be apathetic. Conversely, the largest firms are paid the slowest. That is not surprising either, since the owners are a long way away from both the problem (efficient accounts receivable), and spending time on struggle street.
For decades, the existence of ongoing Conflict of Tension and a Lack of Priority has held many professional firms back from realising their cash flow potential. Remaining inefficient is no longer an option.
Our next Blog in this three-part series explores the two inescapable trends in professional service delivery that will render ongoing apathy around payment efficiency as dangerous. We will explore two reasons why successful adaptation and improvement might generate more revenue opportunities. Conversely, we will also explore two reasons why failure to adapt may spell an end to the golden weather for professional service firms.
At smartAR, we provide a range of business cash flow improvement tools to save time and help grow your business. Learn more about our cash flow management solutions.