When contemplating your practice succession, you need to review your debtors. Suppose you have excess debtor levels (greater than 30 days). In that case, you should consider strategies to address this issue; it will likely be viewed negatively by your successor and ultimately impact your practice value.
In the market, many firms have introduced fixed-price agreements and are billing clients monthly or quarterly. In addition, some firms are now billing upfront and eliminating debtors. If your firm raises invoices at the end of a job and has excessive debtors, whilst you're not alone, likely, this approach will negatively impact the success of your practice succession.
Selling your practice with high debtors can have several implications for you as you progress your succession plans, including cashflow restrictions within your practice and the risk of bad debts, which will negatively impact your practice value and lower negotiating power throughout the succession deal.
One of the challenges of running excessive debtors in your practice is that you have ‘trained your clients’ that a specific payment approach is acceptable. ‘Retraining your clients’ is better done by you than a new face, and better if this is addressed earlier than later.
There are several strategies that businesses can use to reduce their debtors, including:
Payment terms: Setting clear payment terms and communicating them effectively to customers can help to ensure that invoices are paid on time. This can include offering discounts for early payments or charging late fees for overdue payments.
Debtor management: Regular follow-up with clients to remind them of outstanding invoices can help to ensure that payments are made on time. This can include sending invoices promptly, making phone calls and sending email reminders. Of course, most accounting packages provide mechanisms for automated follow-up and easy payment, which can easily be adopted into your practice. For historically slow payers, you will likely need to follow them up with phone calls to assist in changing behaviours and receiving prompt payment.
Outsourcing: Outsourcing debtor management and collections to a third party can help to ensure that invoices are paid on time and that issues are dealt with promptly. This approach has a lot of merits as it reduces the impact of creating relationship tension with clients where you are not the ‘debtor enforcer’ following up with slow payers.
Debt collection: Acting on outstanding debts past their due date is crucial. This can include taking legal action.
Reducing debtors requires clear communication, firm debtor management, and follow-up. By implementing different strategies, you can significantly change clients’ habits quickly.
Fee funders are another option to consider, particularly where clients have cash flow issues. The benefit is you get paid 100% immediately, and the fee funder communicates with the client about their payment obligations. Ultimately, if the client doesn’t pay, the backstops with you, and you may have to pay back what has been paid to you if the client doesn’t meet their obligations.
Ultimately, you are not your client’s bank, and higher debtors will not enhance the success of your succession journey and should be dealt with as soon as possible.