The Cashflow Conundrum: Why Accountants Can’t Practice What They Preach

Accountants are masters at crafting cash flow statements and spotting financial trends. Yet, many still struggle with managing their own cash flow and aligning invoicing systems to match how their firms actually function.

Why does this happen? Let's dive into the murky waters of accounting practices and uncover the reasons behind this paradox.

Even in profitable accounting firms, cash flow issues are all too common. You might be grappling with cash flow or failing to maximize it to your firm’s best interests. Enter the dreaded Accounts Receivable subledger—money you need or want to use but can’t.

But why is that?

The primary reason is a misalignment between your client servicing cycle and your billing system. Most firms adopt a traditional product approach to billing and automatically grant payment terms, exacerbating the issue. Even product-producing companies tend to get paid when they deliver the product or service. However, most accounting firms give terms and then fail to enforce them. I've seen instances where a bill isn't collected until the next year's service cycle begins. This is unique to accounting firms—even construction companies use progress billing to avoid these situations.

For a knowledge-based firm like an accounting firm, servicing a client starts immediately. Client care begins with gathering information, advising, and guiding the client throughout the process. By the time we deliver the final service or deliverables, such as a compiled statement and corporate tax return, the actual service has already been completed well before that stage. However, the billing and collection process doesn’t start until we’ve handed them the digital or paper product. Then we start invoicing the customer and asking for payment. This often leads to questions about the bill, what it was for, and sometimes, clients feeling the value provided is much lower than the bill, leading to requests for adjustments.

Unlike products or services where customers pay before using them, our services are unique. In most traditional services, like dry cleaning or auto mechanics, the client does not start using the repaired car or cleaned clothes only after payment, not before. This goes for when you buy a phone, car, and so on. Yes, there are warranties and guarantees, but even if you do not have them explicitly in our contracts, they are implied in our services as well. Even in a restaurant, where you actually do consume the service before paying, the time lag between service and payment is minimal.

However, in our field, the production cycle and servicing the client begin as soon as we engage by asking them for information and ensuring they provide us with the correct information. We help them throughout the process. Our production costs and the benefit to the client are immediate and specifically customized since the work is performed exclusively for them. Unlike traditional services, our costs are specifically related to that client and cannot be absorbed by other clients. This level of customization in other industries requires a lot more security regarding payment of services than generic items. For example, events that are for a specific customer are fixed and need to be paid upfront before the event starts. This makes sense since it is a customized item and cannot be absorbed by their other clients.

Our interactions with our clients are completely customized from starting the engagement with the client to completion. However, the actual production costs, billing of the services, and eventual collection of payment average 150 days after the service has been performed, with terms included. That is why quite a few industries that perform similar services have a completely different billing and collection cycle.

Interestingly enough, the only time our industry adopts a similar approach is during personal tax season, reducing it to a 60-90 day cycle. What’s interesting about this change is the improvement in cash flow. The cash flow surpluses are usually at their highest in a firm during their 12-month cycle. However, after tax season, they resort back to a very long collection cycle. We know this because this surplus usually carries the firm through the dry season, which normally reaches its pinnacle around January the following year.

Imagine if your billing cycle matched your servicing cycle. How would that impact your firm’s cash flow? The ease and security of handling unexpected issues or investing in technology, staffing, and growth would be significantly improved.

Now, the number one reason accounting firms do not adopt this method is the fear of upsetting the client. They worry that clients will leave for another firm at the mere mention of upfront payments. The second issue is the avoidance factor—accountants are uncomfortable asking to get paid. Most love providing services but turn into nervous wrecks when it's time to collect payment. Asking for money before the service is completely rendered makes it even more awkward, though I’m not sure why. Every other industry requires payment before or shortly after the service is consumed. The reality is your clients are quite accustomed to doing business this way; we’ve just trained them otherwise.

This fear is purely internal. In reality, your relationship with your clients is robust and strong, and a change in your billing policy won’t impact it at all. You are in the financial relationship service business and are actually valued as one of their most trusted advisors for their corporate and personal well-being. This is the core of why they are with you.

If you believe that your clients will leave en masse because you have changed your billing cycle, then you have more serious client service problems to address, and I guarantee they are not related to aligning your billing system with your production cycle.

Once you get over these fears, correcting your cash flow problems involves straightforward steps. However, most firms often find them hard to set up, follow, and consistently implement. If you have trouble implementing the steps below, contact me, and I will help you through it.

So here are the 5 easy steps to becoming cash flow successful:

Step 1: Price and Bill Before You Start the Engagement

Even if it’s a recurring engagement, price it before you start. If you are on a menu or subscription model, it is already built-in, and these steps are already automated. However, if you are a value pricing or fixed fee firm, make sure you follow this step consistently. You are using the models that price upfront, so why not bill upfront? If you are using the antiquated and, in my view, the least effective method, which is based on time, you can still follow these steps—estimate the total time, multiply it by your rate, and bill it upfront. Yes, even with the hourly billing model, this can be done.

Step 2: Have the Client Agree to the Scope of Work

Ensure your client agrees to the scope of work and the estimated price. If you’re wary of fixed fees, indicate that additional charges will apply if the estimated time is exceeded during the process.

Step 3: Set Up an Automatic Payment System

There are many ways to do this, but Ignition is one of the best systems for professional firms. Some clients might resist automatic payments, preferring cheques or manual systems. But, most of your clients are already paying automatically for many services. Often, it’s the accountant who resists updating their internal systems to accept digital and automatic payments. If you do not do this step, do not bother. The automation of the payment and triggering the payment is critical for getting your cash flow into overdrive.

Step 4: Set Payments to be paid automatically

Payments can be 100% upfront, progress payments during the process, or triggered at the end of the service. Ensure they are date-specific, not when the client feels ready to pay. What I find interesting is that most firms adopt this approach during personal tax season—payment needs to be made before filing the tax return. The end result for personal tax season is a spike in cash flow, and usually, it is the peak cash flow over the 12-month cycle.

Step 5: Price and Bill Out-of-Scope or Special Projects as Soon as They Are Identified

Any out-of-scope work or special projects should be priced and billed through the production cycle. Once the billing and scope are agreed upon, the rest is an administrative function and can be moved out of the production cycle.

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By following these steps, your lost time related to cash flow, collections, and billing issues is significantly reduced. While this might sound simple and, it should be the mainstream in the accounting industry. Unfortunately, many firms struggle with consistent implementation or adopting this method.

When I analyze a firm's cash flow problems, it usually relates to one or all of the above not being done at all or very inconsistently. Even if you don’t have a cash flow problem due to high cash reserves, not applying this method means you’re not maximizing the true power of your firm’s cash flow. So, gear up and start aligning your billing system with your production cycle.

Accountants are experts at managing other people’s financial well-being, but when it comes to their own cash flow, the struggle is real. By aligning your billing system with your production cycle, you can transform your firm’s financial health. Happy balancing!