Maintaining credit

A few weeks ago I spent a very interesting hour with a potential client, discussing cash flow. Now, before you jump to another page, bear with me for a moment as this will get better, I promise.

The person concerned was spending far too much time accommodating an overly demanding client, often doing so at her own financial expense. By this, I mean that when they were slow to pay third party debts, she would settle the bill from her firm and then try to recover it from the client, not always successfully.

The client showed little gratitude for this indulgence and remained demanding. The potential client was highly stressed as a result.

This brings me to the subject of maintaining good cash flow in a business. Good cash flow management is always very important and becomes increasingly so the larger a firm gets. Many of us will have experienced the constant pressure to bill, keep work in progress (WIP) down and recovery up.

This is particularly difficult for professional services firms who have to pay their staff on a monthly basis, but may not receive monies from the client for several weeks afterwards. However there are various simple measures that firms can take that will help to optimise cash flow.

Create cash flows alignments

This may seem like an obvious place to start, but firms need to align the payment conditions of their creditors and their debtors. If debtors have to pay within 60 days and you have to pay your creditors within 30, you will probably run out of money sooner or later. So why not ensure that your payment conditions are more stringent than your providers'?

Try to bill more promptly. Don't wait until the month end to raise a fee note. Send the bill out as soon as possible. The sooner the client receives the fee, the sooner it will be settled.

It is not always your income that may be causing cash flow problems. Sometimes it may be your expenses as well. Use credit cards to settle debts wherever possible. This can give you about six weeks automatic credit on any debts.

Employ a decent accountant and produce budgets and monthly management accounts. You are going to have good and bad months; you need to be able to foresee when these are going to occur and plan as far in advance as possible. Forewarned is forearmed.

Encourage transparency

Create a culture where people own up to bad debts and bad WIP at the earliest opportunity. Most firms have experienced the disastrous last month of the financial year, when everyone suddenly owns up to the bad WIP and debts they've been carrying on the ledger.

All of a sudden a very good prospective financial year turns into a bad one. I was once recommended to write off all my bad WIP at the end of the third quarter, so that when the annual year end inquest takes place, I wouldn't be in the front line of fire.

The flip side of billing promptly is of course to ensure that clients pay promptly. On large pieces of work,
it is not unusual to ask for an element
of the fees in advance. I have seen firms bill on a quarterly basis irrespective of the WIP, and square off the position at the year end.

Keep on top of debts and ensure that clients pay promptly. This can of course be done in a gentle and supportive way by a credit control department, or in a confrontational way. Not all firms get the balance right.

Retain a large cash buffer in the firm. This has always been a point of consternation in professional practice firms for many years, as equity partners see their profits retained in the practice to fund working capital.

By following a few simple rules like those above, cash flow can be effectively managed. However do remember not ever settle your clients' bills for them.

Geraint Jones is a tax partner at BKL Tax

He writes the regular in-practice article on doing business for Private Client Adviser