In this current economic climate, financial stability should be of paramount importance to the financial director or partner of any firm. The old adage of “cash is king”, still very relevant to all businesses today.
Winning new business is vital for any practice but it is also essential to ensure that the practice is paid promptly for the work it has carried out. It also goes without saying that providing a first-class service to the client is a must, but it is just as important to manage cash resources efficiently and collect all unpaid debts.
It is important that every business has an approach to cash management that is agreed and supported by all senior management, only then can the policy be imposed on the rest of the business. Every business should prepare cash flow forecasts at least once a year ahead and focus on the peaks and troughs predicted. Major outgoings might include partner income tax payments in January and July, VAT quarter-ends, and payroll payments, while inflows might relate to partner capital injections or significant client billing.
As budgets are prepared, flex the forecast to take into account the “worst case scenarios”. Senior management should receive a daily update of bank balances. Regularly update forecasts to take into account material developments, eg, major new client work or unexpected expenditure. Cash flow reporting should be a regular item on the agenda for senior management meetings. Consider setting cash collection targets for all fee earners and incorporating them into appraisals.
Encourage fee earners to agree sensible payment terms with the client before work starts, even if this means agreeing to some short-term instalment plans. Fee earners need to be encouraged to provide good quality work on time, bill their recorded time and collect payment for their hard work. To strengthen your bank account, ensure that clients pay up front to cover all disbursements. As soon as the matter has been completed, send an invoice while the client is still appreciative of the good work you have provided, and ask for payment. Encourage the use of interim billing wherever possible and ensure invoices are sent out promptly on the due dates.
If a monthly retainer payment has been negotiated, check that this is in line with time being recorded on the matter, so that work in progress is not building up. When billing, provide the client with a breakdown of fees if they have or are likely to ask for this – do not provide the client with an opportunity to delay payment of your fees. Shortly after sending your bill, make a quick telephone call to ensure that the client has received it, and that payment is not going to be delayed for any reason. Consider sending a confirmation email, as your first reminder to the client, with a copy of the invoice attached.
Accounts Receivable best practice
Implement a highly functional and automated Collections system like CreditForce
Do not leave cash collection to fee earners. Not only is it not their specialty, but non-payment may be an indicator of other problems – eg, a complaint about the quality of work performed – and having someone independent of the fee earner collecting debts can highlight such issues
Make use of credit checking procedures for new clients, and link the information into CreditForce to keep Collectors informed of any changes to Client’s credit rating
Chase by email or telephone. Email is a more traceable method of communication and creates an auditable trail which is automatically saved into the CreditForce communication history. Telephone is more personable, and the Collector will be able to save an auditable note that again gets stored in the communication history
Once money is available in a client account, make use of the Solicitors Regulation Authority Accounts Rule to move client funds promptly once an invoice has been issued
Be prepared to negotiate instalments – and using CreditForce set up a payment plan. If a payment is missed, CreditForce can automatically create a "reminder" task for the Collector to follow up on
Be prepared to stop work – if interim invoices are not being paid there is a good chance your client is in difficulties
Be prepared to issue proceedings to recover your fees
Make provisions for bad debts in the management accounts as soon as possible and consider the impact on the cash forecast, this can be automated using the CreditForce provisioning tool
Use CreditForce to run reports on debt listings and regularly review these during management meetings, record the actions proposed for later review
Consider factoring invoices or accepting debit and credit card payments to boost cash flow
Whatever approach is adopted, monitor cash flow carefully—Cash is still King.
To discover how CreditForce can help with your practice's working capital, accounts receivable and client account management, click here to request a demonstration.