Exploring two options to ease a potential pain point when making the switch
You’ve finally decided to take the plunge. Not only are you moving to fixed fees, but you’re also taking full control over your revenue by moving all your clients over to monthly recurring fees.
Once you understand the concept of fixed fees and how pricing in advance works, the transition over to monthly fees usually isn’t all that difficult. The biggest – and maybe only – inhibitor to this move is the uncertainty around existing work-in-progress (WIP) or unbilled work. So how do you deal with this and ensure that you’re fully protected going forward?
You want to move your clients to fixed fees from the beginning of the new financial year, but there’s a problem. You’ll be busy completing their annual accounts and/or other time-consuming work early on in your engagement.
Fixed fees essentially means a smoothing over of fees throughout a 12-month period – so what if the client leaves halfway through the year, and you have already spent a significant amount of time on work that they haven’t yet paid for?
For example, if you engage a client on a monthly recurring basis from 1 July 2020 to 30 June 2021, you’ll probably still be completing work such as annual accounts and activity statements within that period, but which still relate back to the 2020 financial year.
There are two possible solutions for you to pick from:
A combination of bill-on-completion and monthly recurring invoicing for the first year
With this method, you kickstart monthly recurring invoicing from the beginning of a new financial year for all work that relates to that financial year only. Following on from the example above, the monthly fee will cover work that relates to the 2021 financial year work – so by the time you get to 30 June 2021, you have effectively been paid in full for all of the 2021 work (some of which may not have yet been completed). Then, as you finalise the 2020 work, you will raise your last set of bill-on-completion invoices to the client to cover off all the work you have completed.
Straight into monthly recurring only
If you decide to just move into monthly recurring, then you need a mechanism to protect yourself in case your clients leave during the year before they have fully paid for the work that you’ve already completed.
One way to do this is by breaking down the cost of each service in the proposal as if they were still being charged as a bill-on-completion client. Then, in your engagement terms, ensure there’s a clause that notes the monthly fee is for all work over 12 months – and if they terminate services during the contract period, they’ll be liable to pay for any completed work that has not yet been paid via the monthly fee.
This process would then require you to reconcile payments made versus cost of work performed to calculate the difference and the on-charge.
Whichever strategy you choose to adopt, make sure that you do one thing: communicate with clarity. Clients hate confusion, especially when it comes to money matters. Make sure you outline all the key details regarding your billing process and ensure that you’ll always be on hand to answer any queries that they might have.
Carl Reader is chairman at multi-award winning firm d&t and Head of Accounting (EMEA) at Ignition. Carl serves as Chair of ACCA UK’s Practitioners Network Panel and is the author of BOSS IT. Carl is widely recognised as a thought leader in the accounting profession, speaking globally to accountancy audiences about a range of topics.