Accountants suffering toxic debts

  • Poor cash flow and extended debtor days are affecting practices
  • Clients are taking longer to pay or sometimes not paying at all
  • How can clients take business advice from someone who doesn't manage their own business well?
  • Read on for tips on managing these issues

Bad debts are on the increase among accountancy practices, but it doesn't have to be like this, argues practice consultant Finola McManus.

The recession has put considerable financial pressure on clients and as a result, accountants are suffering the after-effects. Some of the most common problems at the moment include:

  • Debtor days extending: Practitioners are experiencing continued difficulties in asking clients to pay when they know they are struggling with cash flow themselves.
  • Poor cash flow: This often results in difficult decisions to be made about spending, expansion and driving the practice forward as planned.
  • Payments missed: Clients are not paying when they promised to and payment plans are not being adhered to as previously agreed.
  • Bad debts on the increase: Bills are being disputed for work already done.
  • Work in progress carried forward: Practitioners are carrying work forward for fear of billing out and not wanting to 'face the music' and write it off as this will impact profit/results at a time when the practice bank account is already stretched and the overdraft is groaning.
  • Payment systems in disarray: Standing orders are being cancelled by clients, or used as a settlement plan to deal with debtor arrears, whilst work in progress on the current year continues with no plan in place for the client to pay for it.
  • 'Bad' clients: Practices are taking on new clients, only to find that they will not pay for work done or, at worst, don't make it through the first year and go out of business themselves.
  • Clients refuse to pay: Practitioners are doing valuable work for existing clients only to find they don't want to be billed for it or pay.

All of the above causes real stresses in the day to day management of accountancy firms. Teams quickly pick up on the issues and can feel demoralised and demotivated. Partners then struggle to feel upbeat as they have to pay their team monthly and there is often little cash in the pot to justify paying what their own drawings should be. Very quickly, a partner can become disillusioned and question themselves on why they are working so hard for so little return.

The following checklist of 'top tips' is designed to help practitioners overcome these issues and hopefully build a solid foundation for the future.

Bill Smarter

Put in place fixed price agreements with all clients for the year ahead and renew these agreements annually. Clients love this as they can clearly see what you will do and how much it will cost. Everyone loves a transparent and simple way of doing business. At the same time, agree a payment plan with clients for the work detailed in the fixed fee agreement. Ensure standing order arrangements are timed to cover you before work is done, or as a minimum, within 30 days of you incurring work in progress on that client. Any work done outside the scope of the fixed fee should be quoted for and agreed with the client before you start the work. Agree to bill for this extra work monthly or on completion if earlier. Agree in your terms with the client that these 'extra work' invoices are to be paid by return. In this economic client many clients are unwilling to enter into direct debit arrangements. There are of course exceptions to the rule, so it is always worth asking a client for a direct debit mandate before a standing order arrangement.

Get your credit control in order

Look at how you monitor and manage your debtors list. Strong credit control and cash chasing is critical. I am always surprised when I still see many larger firms that don't have a basic credit control system in place. Partners themselves should not perform this function as it is not an appropriate use of their time and indeed, they are too close to the client. It works so much better if it comes from a team member.Ensure that you have a system in place and policy for solicitors' letters to be sent when a payment promise is broken by a client. You will only have to send such a letter once and the client will see that you mean business. Many clients pay late as they know accountants won't give them a hard time, unlike many other suppliers. It's time for you to explain to a client that you have your own business to run and staff to pay. How can they value their accountant and take business advice from someone who clearly doesn't manage their own business very well? Bad debts should be a thing of the past. All work has to be covered by either a standing order mandate or 'half up front and balance on completion arrangement' in order to cover your risk and exposure to bad debts. Don't be afraid to put a client 'on stop' if they fall into arrears. This means that you do not continue to do work for a client who still hasn't paid for the last thing you did for them. If you have fellow partners you can always play the 'good cop' and blame it on 'practice policy' and the 'other partners'. This will often soften the blow on the hard line attitude you have to adopt.

Keep an eye on your work in progress

If a client is paying by standing order on a fixed price agreement in advance of you doing the bulk of the annual work, then you should actually have negative work in progress and positive cash flow for a large part of the year. In real life, you will do extra work for clients that couldn't be foreseen and included in the fixed fee agreement. Given that this work should now be agreed upfront with the client, there should be no issue with regard to recovering work in progress. However, you should still review the firm's work in progress ledger monthly to ensure that nothing has fallen through the net. Now is the time to clear out those skeletons in the cupboard! That means you have to suffer the pain of reviewing what is actually hiding in work in progress now and either bill it out or write it off. Work in progress often proves to be the biggest challenge for firms to deal with. Many partners are familiar with the old routine of carrying it forward to next month and beyond because we know the client will 'kick' when we bill it and we really can't face having the discussion yet. In reality, there will never be a good time. In order to get to a new start point with fixed fees and standing order arrangement mentioned above, you will have to review your work in progress and deal with it. Cleaning out old work in progress will inevitably involve some write offs and discussions will have to be had with clients about what you want to bill and recover before you put the new arrangement in place. Learn from the pain of seeing the write offs on what you failed to bill in the past and see it as an opportunity to make sure that you don't run your practice like this in the future - you will only have to complete this process once. The memory of it will be so painful you will vow never to go there again.

Sack bad clients

Have a close look at your clients that are persistent poor payers. If they agree to your new way of doing things with fixed fee agreements and standing orders, that's great - problem solved. If they don't agree then consider 'sacking' them as a client so they can move on and mess up someone else's accountancy practice and not yours! Where a new client approaches you, get a payment plan in place to cover work being paid as it is done. For new business start ups agree an annual fee in advance to cover set up work and agree that you will quote for the first year's accounts and tax when you are three months before the first year end.This seems blindingly obvious, but many firms quote a first year's fee before they know how the new business will actually do and the volume of transactions. It is also common to see the first year's fee quoted spent and up in smoke on compliance set up matters before you have even started the first accounts. We've all got used to allowing 100% of the fee on a first year new start up client to be written off and deemed this acceptable. In reality, this is madness and it doesn't have to be like this.

 

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