Continuing my series on surviving recession drawing from our experiences in the last downturn (entry point for the whole series here), a remarkable number of professional services firms are not good at getting cash in. Too many carry excessive work in progress, essentially funding client operations.
As recession bites, clients begin to delay payments to preserve their own working capital. In our case, we found that the average age of our receivables began to blow out from just over thirty days to forty then to sixty and even 120 days. I am talking about good clients who could pay. This tightened an already strained cash position.
To overcome this, we launched a collection program. Our problem here was to find a way of doing this without disrupting relations with clients (and especially individuals) on whom we were dependent for future work.
Many firms in this situation try to rely on individual professionals to follow up their own clients. He/she is your client, you sort it. This can work. However, many professionals find it an uncomfortable process. It is also one that can alter relations between professional and client. To overcome this, we adopted a multi-stage approach.
In most larger organisations, the direct client may authorise payment. However, payment then has to be made by accounts areas who may be operating under different rules.
We began with close monitoring.
Where our relations with individual clients were good (here I mean not just the organisation, but also the specific individuals involved) we found that we could sometimes get early payment even within thirty days by a private chat at the time of billing. In other cases where the individual might authorise but could not control payment, we focused on the accounts area. To do this, we had to understand the payment system in the client.
In our experience, the people we were dealing with in a professional role were happy to explain how their payment systems worked. Once we knew this, we could follow up.
Now here comes an important distinction from some firms. We did not ask our professionals to talk to accounts areas. They had neither the skills nor the time to do this. Instead, we used our own accounts people because they could talk like-to-like.
The approach was always the same. An initial call to check on the status of the account immediately following the thirty days. This was always done in a gentle, friendly fashion, seeking information. Our accounts people would always explain that they were doing cash flow planning. With on-going clients, a key aim was to establish individual relations.
In a remarkable number of cases we actually got fast payment. Where the accounting areas were operating under fixed rules - in one case an instruction to pay at 120 days! - we at least knew.
We already had tight work-in-progress monitoring systems in place, in combination with billing rules. A surprising number of firms do not - WIP can build and build. I have seen many firms still carrying WIP in the accounts that is more than five months old. This can play absolute havoc with accrual accounting systems because it creates a divergence between the firm's real position and that shown by the formal accounts.
If you do not have these systems in place, then you must establish them. Otherwise you may go broke while showing an apparent profit.
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