Lock-Up

If you need to free up cash in your practice then the area to address is Lock-up:

“ The amount of practice cash tied up in debtors and work-in-progress.”

Lock-up is effectively the period of time that passes between starting work on a client assignment and getting paid for that assignment.  It has two main components:- work in progress (wip), being the costs incurred on a job before it is invoiced, and debtors, the value of unpaid invoice.  Too often these get looked at in isolation.

The secret to minimising your firm’s lock-up is to have, firstly, a targeted approach, and, secondly, systems that reduce wip and debtors that are effective from the point that a client joins the firm.

Let’s propose a target of 45 days for lock-up.  For most firms the actual figure is significantly in excess of 100 days but lock-up of 30 days and less is feasible and can even be negative with annual service plans (see later).

Having set the target, a firm should have multiple tools in place for reducing the two elements.  Let’s start with work in progress.

Seven Steps To Reducing WIP

1. Managed Workflow Process

Every assignment should be visibly tracked through the firm, with simple planning, deadlines for each stage of the process and defined responsibilities.  Essential for quality assurance and efficiency.

2. Agreed Timetables

From before the outset of every assignment, partner, manager, team member, administrator and client should all be working to the same timetable, start to finish.  Managing the client is as important as managing the staff.

3. Deadlines

Every task should have a deadline.  Work backwards.  Set the date for whatever the last stage may be (sign off, client meeting, filing deadline etc) and set a date for every key stage before that point.

4. Client Incentives

Incentivise the client to have the right records available at the right time.  Client education and a managed system is required to support the client in doing this but your price structure should reflect the amount of support the client gives you in doing your job as well as the other way around.  Cut off deadlines, and ‘call to action’ points should always be used when information is required from the client.

5. Staff Incentives

If staff receive the same deal whether or not they achieve budget, then where’s the incentive?  Staff are motivated by different factors to the partners.  They have no ownership in the business and work to a contract so the system of remuneration should reflect this.

6. Assignment Billing

Don’t wait until the end of the month (or worse!).  As soon as the job is done for the client, bill them.  You’ve already incurred the costs so why wait.

7. Regular Billing

Where work is ongoing, continuous or protracted, have a procedure for interim or period-based billings (in conjunction with assignment billing).  Your main overheads are monthly so billing should at least match this.

Seven Steps To Reducing Debtors

1. Accurate And Relevant Engagement Letters

Not the same standard every time.  The engagement letter should reflect that actual terms of engagement and payment in each case.  This brings client awareness of your terms, reduces the delays caused by dispute and give you powers in your collection procedures.

2. Annual Service Plans

Give the client an “all in” fee for the year ahead, encompassing all known compliance, support and advisory work and allowing for an appropriate level of contact.  Then set up a regular standing order for the same period.  You get paid, often in advance, and the client gets clarity and managed cash flow.

3. Quotes And Fixed Fees

Where possible, assignments should always be quoted in advance to a fixed fee approved by the client.  Excellent client service but just as importantly it removes a large potential area of dispute.  In the case of unavoidably open ended work, such as a difficult tax enquiry, all rates at least should be agreed in advance but it is possible sometimes to fix prices for each stage of the assignment.

4. Multiple Payment Options

Have a choice of options and ensure that the client has agreed which to use before the assignment begins.  Annual billing, stage payment, standard invoice terms, Premium Credit etc.  The more choice the better but it has to be appropriate for both sides and agreed in advance.  Price structure can vary from option to option.

5. Reward The Good

Incentivise clients by discount or a reward system for keeping to their chosen scheme.  Clients who keep to the terms shouldn’t be subsidising those who don’t.

6. Penalise The Bad

Those clients who abuse the system or fail to keep to agreed terms should meet the added cost of their inaction.  In its simplest form they pay the undiscounted price having not met the terms, but interest, penalties and loss of credit terms are all steps available to you.  A client who leaves because you are not prepared to fund their behaviour is not a client you want in a successful practice.

7. Credit Control Process

Credit control is made much easier by all the above steps but underpinning it all should be a clear and effective procedure for collecting debt.  A system comprising scripted phone calls, letters, emails and SMS texts, done to timetable, is essential.  Regular contact is always the most effective approach.  Conversations should always be polite, clear and with a call to action.  Regular contributions to a debt for clients who you are supporting should always be sought.  Legal action is a last resort but essential for those who abuse your support.