This article was first published in the November/December 2016 UK edition of Accounting and Business magazine.

Cashflow is a bit like high blood pressure: when not managed, the fallout could have dire consequences for the health of the business.

‘In many firms, the time between paying the highest costs – salaries and wages – and the receipt of the cash is measured in multiple months, causing heavy demands on working capital and cashflow,’ says Sue Cohen, consultant in project management and business process review. ‘Often, this is the norm: if it takes three months to do the work, then a few weeks to agree everything with the client, the bill is sent four to five months after the work started.’

Then payments are often slow to come in. Fee collection periods differ from practice to practice and from one industry to another, but there is a chronic late payment culture overall. Research from BACs Payment Schemes shows that more than three-quarters (76%) of small and medium-sized businesses have to wait at least a month beyond their agreed contract terms before getting paid. On average, smaller businesses are owed close to £32,000 at any one time, although 25% admit that £20,000 or even less is enough to jeopardise their business prospects.

The knock-on effect of this is that roughly a quarter of small business owners have taken a cut in salary to keep cash inside their businesses, and one in 10 are having difficulty in paying staff, as well as regular bills, on time every month.

Ease the pressure

While the principles of good cashflow management are straightforward (you have to have more money coming in than going out), cashflow ups and downs are more manageable for larger firms with access to more working capital. So, what can smaller firms do to improve liquidity?

‘First of all, look at your firm’s cash situation weekly and aim to have reserves of at least 90 days “survival” time,’ says Heather Townsend, co-founder of The Excedia Group, a consultancy that specialises in advising professional service firms.

Cohen recommends a review of systems and processes: ‘Are they as robust as they need to be? Is it easy to calculate and raise bills? Do all staff and partners understand the firm’s working capital and structure?’

Billing and payment terms – when the invoices will be sent and when they should be settled – need to be made clear from the off, in the engagement letter. ‘The agreed terms can then be referred to, should payment need to be chased,’ says Steve Hale, partner at accountancy firm Perrys. It should also go without saying that all work is quoted, and the quotes agreed by the client before the work actually starts. ‘If you decide to charge extra for work provided at short notice, this also must be agreed before you proceed,’ says Mariah Tompkins, director at WKM Accountancy. In short, the client should expect the bill. ‘No ambush billing – it’s the number one reason accountants do not get paid,’ says Simon Chaplin, owner of GreenStones Accountants.

Invoicing in stages

As for raising bills, Cohen suggests work is invoiced as soon as it is completed, whichever day of the week or the month that is, rather than waiting till the month’s end, which only delays cash coming in. But she also adds: ‘Many assignments break down into stages, which can be identified at the start, and then invoiced in stages, too.’ If your firm still keeps timesheets, raise on-account invoices and bill any work in progress at least monthly. ‘I’m amazed how many practitioners still do a mad bill-run two weeks before their year-end to clear out work in progress,’ says Chaplin.

Townsend adds that any ad-hoc work should also be invoiced promptly. ‘All too often these extra bits either get forgotten or are billed late,’ she says. Chaplin suggests asking for at least 50% payment for ad hoc work in advance. Cohen recommends obtaining upfront deposits from new clients, too. ‘And preferably also in respect of significant new pieces of work for existing clients – say 10% of the likely fee,’ she adds.

Pre-empt problems by ensuring that all invoices go to the right department at the client’s and that there will be no problems with payment. ‘Deal with any fee query quickly; don’t allow a question over a £75 charge for some ad-hoc advice to hold up payment of a £2,500 invoice for instance,’ says Hale.

To ensure a steady inflow of cash, Tompkins encourages all new clients to pay on a monthly basis. ‘Some don’t take this option, hence we make it clear before we submit the accounts that all payments should be made within seven days of the date of the invoice,’ she adds.

However, Hale warns that allowing clients to spread their accountancy fees over equal monthly instalments should be thought through. He says: ‘The timing of the payments must be such that, by the time the work is carried out, all fees, or certainly a large proportion of them, have been received. It’s no good if the client makes 12 monthly payments after the work has been completed.’ If the size of the firm allows it and the costs are not too high, Hales suggests getting authorisation to take the monthly instalments by direct debit. ‘This way the responsibility for settlement of the invoice rests with the firm and not the client,’ he says.

Make payments easy for clients in other ways, too. ‘Have the option to pay by credit card – whilst there’s a cost associated with this, it may lead to cash coming in quicker, saving costs elsewhere,’ says Hale.

In many cases, clients need prompting before they pay the bills. ‘Use software that can produce an aged debtors list and have an updated version of this next to the phone. When a client calls with a tax or other query, mention that an invoice is about to fall due,’ Hale says.

When they do not pay on time, Townsend says outsourcing debt collection should only be used as a last resort. ‘Getting the professional “heavies” involved is fairly drastic. The best way for small firms to get prompt payment is to have a credit control process, which they instigate in-house first and foremost. So an email or phone call from manager or partner to let the client know the invoice is coming; then a reminder a few days before the bill is due, which can be automated; then have any in-house resource chase before outsourcing to debt collectors,’ she says.

Nevertheless, some firms do use fee funding services to get their money and leave the debt collection headache with them. ‘Costs and interest rates are fairly low, and they can be passed on to the client,’ says Chaplin. However, he adds: ‘Fee funding shouldn’t be necessary if you invoice regularly, use direct debits and stop ambush billing.’ Besides, if the client does not pay, the debt reverts to the practice and the headache is back.

Iwona Tokc-Wilde, journalist