Updated: Nov 10, 2021
You are working hard for your clients, doing everything you can to finish their work.
Your team is putting in the hours, but you need a couple of unexpected items from your client. You contact your client; you request the information, and you wait. You follow them up; you wait. The work you have done to date for your client is significant, and there are many thousands of dollars in work in progress (WIP).
Unfortunately, your invoicing policy is to send a bill at the end of the job, so you wait patiently. This is not ideal, as you still have your bills to pay, such as staff – because they want to get paid on time, your rent – that needs to be paid promptly, your software subscriptions – they don’t wait, but you continue to wait. Unfortunately, the situation with your client is compounded across your client base, as there are many similar examples, and your WIP blows out too well beyond 60 days, to 90 days, to 120 days, to more than 180 days, and you continue to wait.
As business leaders, as business advisors, as businesspeople, is this the best approach? Is this the right approach? If you were advising your client with this type of cash lockup, indeed, you recommend they implement strategies to unlock their cash flow.
As the accounting profession evolves, more and more firms are moving to interim billing – end of the month, end of the fortnight, etc., and fixed price agreements with monthly payments in advance and away from the end of job policy. Imagine a professional service firm with no cash flow held up in work in progress; what a joyous business. The reality is, there are a growing number of practices like this around Australia. Accounting and advisory firms have retrained their clients that ‘they are not a bank’ and engaging their services to have new billing and credit terms. In addition, for challenged clients, some firms have implemented different types of fee funding solutions to assist clients with payment options.
So, an interesting question is how work in progress is viewed during the succession process? Well, as you can imagine, cash flow is essential. Without question, excessive WIP levels will impact your practice value. Conversely, practices with solid cash flow are viewed more favourably. Imagine if you were standing in the shoes of your successor and you were comparing practice with 90 days WIP compared to a similar practice with 0 days WIP. It is a no-brainer, which is more appealing.
Perhaps another interesting question to consider is, if you do have excessive WIP (at least from your successor’s perspective) and your successor decides to change your billing process, what will be the impact of this change in your practice. If it is likely that such a divergence from the old way (your way) might cause some levels of friction – indeed, this is not the way to start a new relationship.
The simple truth is that you are far better to manage a change like this in your practice, given your pre-existing client relationships and goodwill with clients. If there is any client resistance, you are better placed to address client concerns than a new successor/owner.
If your WIP is excessive (say more than 60 days), this is a real issue. Now is the time to address this issue, to eliminate this future headache by introducing a new billing policy today across the practice. Not only will you improve your cash flow, but you will also remove a value detractor for your future successor. You will be rewarded for your efforts through your succession journey.