Managing cash flow is a widespread problem for accounting firms. There are a number of simple changes that you can make to help deal with your cash flow more effectively, which will help keep your business running smoothly.
To improve cash flow, you need to change the pace of cash coming into the business, and spread the rate of outgoing cash evenly across the month. There are a number of ways to help achieve this. One of the best ways is to implement a value-based pricing system in tandem with using upfront payment methods. Value based pricing is looked at in depth in our article How Value-Based Pricing Works For You.
Value-based billing goes hand-in-hand with upfront billing. Upfront billing is one of the surest ways to improve your cash flow, because you receive all, or the major part of the bill before you start work. While value-based billing works best with an upfront payment policy, if you use hourly billing systems you can still implement upfront payments by charging a portion of the estimated time of a project upfront, and the remainder upon completion. Some of the most effective ways to encourage upfront payment include:
- Offering clients credit card payment options
- Offering incentives for full upfront payment (such as a 5% discount)
- Offering the option of partial upfront payment, or payment upon agreed upon milestones throughout the life of a project.
Why Your Training Impedes Your Cash Flow
Most accountants are trained to bill hourly; we’ve already discussed how this can be detrimental to your cash flow in our article How Value-Based Pricing Works For You: a job takes longer than expected; you need to bill your client more…..the client resists the fee and the negotiation wastes time and thus your cash flow suffers.
In addition your training may be damaging your cash flow in another way too. Ask yourself, when do you pay your bills? If the answer is, we pay our bills “when we do our check run” then this may be creating a problem for your cash flow as well. The issue is with timing. The key is to pay all invoices on the date they are due, once they are approved, rather than paying them all at a once. What it does is slows down the rate at which money leaves the bank, or your cash outflow, which will in turn help to improve your overall cash flow.
Another aspect of standard billing practice that could be stifling your incoming cash is the time allowed for payments if you haven’t already switched to an upfront payment method. Offering 60 or 90 days to pay an invoice may seem like a way to keep a client happy, but it’s most assuredly going to give you cash flow problems and doesn’t really bring that much value for your client either. Consider reducing your payment terms to 14 days or even 7 days.
Other Ways to Improve Cash Flow without Dramatically Changing Your Billing Style
Charge Interest on Overdue Payments
Charge a nominal 1% per month interest for money owing past the due date. This has worked well for some businesses in the past.
Factoring is a method of securing your cash flow by selling the invoices of your clients to ‘factors’ or businesses that buy invoices of customers that have good creditworthiness. The factors will advance most of the invoice amount to you (typically 70% or 90%) then when the client pays the factor, they remit the balance to you, withholding their factoring fee. This works out great if you have a couple of large invoices that are choking up your cash flow, because you will have most of the money within a day or a couple of days, and the factoring fee will not eat away at the principle amount of the invoice. If however, you have multiple small invoices, factoring them is probably not in your best interest as a way to create cash flow, because the factoring fee may become costly.
Fee funders are similar to factors in that they pay you the value of an invoice. They differ however, on how the client repays them. Clients can repay a fee funder over a select term period, which means a client that has a large invoice has the option to repay in installments to the fee funder, while you have already received the full payment upfront from the fee funder.
Take QuickFee as an example. They specialise in fee funding for accounting and law firms, and it costs the firm an initial joining fee to access their services, after which there are no more fees for using the fee funding service. You can then offer their services to select clients, creating a repayment agreement that suits your client’s needs, i.e. a monthly repayment over 6 months. Upon approval, QuickFee credits your account with the full invoice amount and will direct debit the agreed amount from your clients’ nominated bank account until the invoice is paid in full to them. It’s a cash flow solution for you and your client.
Cash flow problems have potentially huge knock-on effects; growth can be impeded and revenue opportunities lost. Time is wasted chasing late payments and it causes a lot of stress. For some companies, cash flow issues can simply mean the business goes under. So if your cash flow could be better, do yourself a favour and do something about it now!