It never ceases to amaze me when I see civil engineering firms with extended accounts receivable. It’s just ridiculous that, as a group of companies, we tolerate average accounts receivable of 80 days, 90 days, or even more. I have seen individual companies with average accounts receivable as high as 260 days.
Firms can operate at 120 percent of productive capacity, sell new jobs like mad, and still go broke because clients don’t pay when they are supposed to. That’s why I developed the following "12-step program" for companies that want to improve their cash flow dramatically: Step 1—Admit you have a problem. Seventy days is too long to finance your slow-pay clients. Ninety days is ridiculous; 110 days is really crazy. Why should lawyers, accountants, and management consultants get paid 40 days before you do? You must acknowledge the problem.
Step 2—Get mad. If you aren’t mad about the situation, you won’t do anything about it. This is unacceptable. You did a good job—better than a good job, right? Then you deserve to be paid.
Step 3—Acknowledge that you are a big part of the problem. If you didn’t willingly keep selling jobs to clients who have proven themselves as slow payers, you would be better off.
If you didn’t let other principals stop the collection process for their clients, you’d be better off. If you didn’t get sloppy with your own billing and collection efforts, then maybe you’d be able to get others to do what they are supposed to. If you have a problem, look in the mirror.
Step 4—Draw strength from your higher power. You are not powerless over this problem. You are in control of yourself and can decide to do things differently. Be willing to make a poor-paying client mad. You are going to be OK, no matter how painful it gets demanding payment per mutually agreedupon contract terms.
Step 5—Get motivated to do something about it. You need to take the lead. Stop griping and whining, lay out the plan, and then implement it. Without implementation, nothing good is going to happen. No one can stop you.
Step 6—Make sure no job number is opened without complete billing information. This is a principle of Billing and Collection 101. There cannot be any exceptions to proper project initiation.
Step 7—Turn around draft invoices in less than 24 hours. This is an internal requirement. Convert invoices to electronic files and send them to project managers for review.
Insist that managers get them back with any changes in 24 hours. No excuses.
Step 8—Bill continuously throughout the month.
Thirty percent or more of firms still don’t do this. If a project billing phase is completed on the second of the month, send a bill out on the second, not on the 30th when they normally go out.
Step 9—Send all bills electronically as PDFs. Follow up with snail mail. This will get your bills processed that much sooner. And, if there’s a problem or question, make it easy for your client to ask you via e-mail so you can resolve it.
Step 10—Follow up on every bill a week after it is sent.
This will help you find out whether it’s being processed for payment.
Step 11—Always follow established collection procedures.
This means no exceptions. For example, just because someone is busy with an accounting software conversion does not mean you can stop following all of your established collection procedures. Or, just because a recent acquisition is taking up accounting resources does not mean it’s OK to back off collections. These things do not excuse anyone at any time from doing their part in collecting the money.
Step 12—Realize you are not alone. Encourage peers to do as you do. The more we join together and stop allowing unethical clients and undisciplined partners and co-workers to run over us, the better off we all will be.
Following this 12-step program can put you on the road to recovery as it relates to your collections. There is nothing to stop you from getting accounts receivable down to 40 or 45 days!
Mark Zweig is founder and principal of ZweigWhite.
Sidebar: A better invoice
The format of invoices and the information contained in them can impact how quickly clients pay. The following items can encourage prompt payment:
- include an invoice or project number to distinguish one invoice or project from another;
- state the billing time period to reconcile hours being billed with the work accomplished;
- show previously billed but unpaid amounts to remind clients about outstanding balances;
- indicate terms of payment, such as 30 days or upon receipt;
- provide instructions for remitting payment, including to whom the check should be made payable and the address to which it should be sent; and
- include the project manager’s or principal’s signature to assure clients that the invoice was reviewed personally.