When I was first in practice the normal practice for accountants was to issue invoices after doing the work and then to provide clients with a further 30 days (or more) credit. I now encourage my sole practitioner clients to move away from this historic approach.
One sole practitioner accountant recently told me that, over the past 6 months he had reduced his debtor days down from over 90 days to less than 30 days. This had allowed him to withdraw around £10,000 more from the practice – and with no change to his tax bill. It was ‘free’ money. Already earned and taxed but previously tied up in the business as debtors.
I appreciate that you may have some longstanding clients who are now akin to friends. And you may find it tough to push them to pay you faster than they have ever done. But, that is no excuse for running your practice like a charity, ignoring best practice and revealing your own poor business sense to clients.
1. Many studies have revealed that an increasing number of accountants have moved their clients to monthly standing orders or direct debits. This helps with fee quotes for new clients too. A fee of £40 per month sounds much more affordable than £480 a year. For lower fees, even quarterly bills are better than single annual bills and make better business sense in most cases.
It’s not just a question of improved cashflow – though this is a key benefit of regular income. It also reduces the risk of you remaining unpaid after you have completed the work. And it reduces the time you have to spend reviewing and chasing debtors. All told it leaves you with more time to do productive (billable) work.
2. Make it was easy as possible for clients to pay you. Credit cards, paypal and GoCardless all make it easy and although each facility levies a small charge this is invariably better than having to wait and chase for payment at a later date.
3. When you issue invoices for ad-hoc and advisory work that is not part of the regular billing cycle, when is payment due? Why not ‘on presentation’? Why automatically give 30 days or even 14 days credit? As a sole practitioner accountant you should keep in mind that your credibility is at least, in part, a function of how well you are seen to run your business. If clients know that they can simply take extended credit from you, this WILL damage your credibility (as well as your bank balance and the profits of your practice).
As you probably know, your ‘Lock-up’, is the aggregate of your debtors and work in progress. It’s the total amount you have ‘locked-up’ in your clients at any one time. By way of contrast if you bill all work in advance you would have no ‘lock-up’ at all.
For years established professional firms often seemed to struggle to get their ‘lock-up’ down to less than 100 days. For many it was even longer than that. Now the trend is downwards in all better run practices.
Techniques for keeping ‘lock-up’ down and reducing debtor days can be used at every stage of the billing process – thus
4. When quoting for work – Consider seeking payments in advance, especially from new clients you don’t know from Adam;
5. When the timescale for the work is extended but you’ve started the work – assuming it’s not your fault that completion has been deferred;
6. When you discuss the proposed fee with your client – thus avoiding unpleasant surprises and reducing the prospect of subsequent challenges and delays;
7. By enforcing your standard payment terms – perhaps allowing an independent credit controller to chase up for late payments (see below);
8. By stopping ongoing work if the previous fee has yet to be paid – to continue working in such cases just increases your lock-up and the likelihood of write-offs down the line.
9. Here’s one simple idea you can use when presenting an invoice to a client at a meeting. As you do so ask, in the same breath, When can I expect to receive your payment or bank transfer? Some clients will respond by asking if 30 days is ok? Others will have their cheque books with them and write one out straight away. Or offer to pay via their smartphone. Others will say ‘within the week’.
10. To everyone who promises to pay you after the meeting ask “Can I hold you to that?”