Debtors
Why aren't your clients paying?
Many firms still have several slow paying clients.
Why?
· The client is experiencing cash flow problems.
· They keep promising to pay but take months.
· They don’t see the problem. They pay eventually.
· They are a “good” client and we don’t want to upset them.
· There is a dispute with the invoice and we haven’t addressed it.
· The invoice was pre-dated (ie. Back dated to month end to reach billing targets).
· They don’t see value in what the firm is invoicing but they haven’t spoken to you about it.
· They only want to pay once a year.
And the list goes on.
The bigger question is why are you allowing these clients to dictate your terms of trade?
Accounting firms are probably the only type of business that allows their clients to pay so long after the goods/services have been supplied.
If you go to the doctor, they expect payment when you walk out of the consultation. A mechanic will not hand back your car keys until you pay. So why are accountants allowing clients to take their time to pay bills?
I know that for some clients, there is a policy of no lodgement until payment is made in full. And many firms also have monthly payments set up. Some firms have a policy of collecting 50% up front before the work is commenced.
What are we doing about the others? Often, we just keep following them up until they decide to finally pay us.
Why? Because our cash flow is pretty good and we are able to carry slow paying clients.
We are comfortable and not experiencing any pain or financial stress.
It’s more uncomfortable for us to address the issue with our clients head on than to carry them.
I understand but there are many reasons that we should address the issue.
Tomorrow, I will outline the reasons that we should deal with slow paying debtors and why this is important to the future of your firm.
Why do you think that your clients are slow to pay?
Tight cash flow - True or Excuse?
In the many conversations that I have had with accountants about their debtors, the number one reason given by clients is tight cash flow. Is this a true reason or just an excuse for the client to keep using your firm as their banker?
Often, the frustrated accountant tells me that the client has just bought a new luxury car, has gone on an expensive holiday, has just bought a new house but they aren’t paying their fees. Why?
Because the accountant is letting the client get away with it. We want to tell the client that if they have the cash flow for the car, the holiday, the boat, the house, then they should have the cash flow to pay us! But we don’t, because it is too hard to have that conversation. It’s easier to wait for the client to pay us eventually.
Addressing the issue is difficult. It takes courage and a decision to value yourself and your team.
The best way to act is with baby steps. Choose your worst paying client amd have a conversation with the team members working on the job.
Ask the following questions:
· What is the yearly fee?
· How long are they taking to pay?
· Is the client profitable?
· How long have they been a client?
· How long have they been slow to pay?
· Is the situation temporary?
· What reasons do they give?
· Do they make a commitment?
· Do they honour their commitment?
· Is there a problem with their business?
· Have we done a cash flow projection?
· How much is it costing in time and resources to chase the debt?
Document the answers and have an honest discussion with your team.
Decide on a way forward and a strategy for getting paid more promptly. Implement the strategy and communicate your decisions with the client and your team.
Let me know in the comments what your next steps are.
Good luck!
Why deal with slow paying debtors?
Most partners I speak with have a good cash flow and are quite comfortable financially. As a result, they don’t address the problem of slow paying debtors because they aren’t in that much pain. Their attitude is that the client is good for the money and will pay eventually.
Confrontation avoided and decision delayed. I know that you don’t have the time to deal with it and you have deadlines to meet. There is no pressing reason to make changes.
Well, I disagree. There are many reasons to take control of your debtors. Let me count the ways:
1. Debtor days affects the value of your firm. You have a good fee base and there is a high demand for accounting firms. However, buyers will look at how long it takes for your clients to pay. They will use this as a bargaining chip in negotiations, as it is an indicator of a lower quality client base.
2. A fee is not a fee until it is collected. The repercussions are many. Tax and GST paid on uncollected fees, losses from debtor write offs, costs of collection, etc.
3. Team motivation suffers, even though they might not say anything. The value of their work is undermined when a client takes too long to pay. They get frustrated, angry and resentful. Your team has busted a gut to help the client, who shows that they don’t value the work done by not paying in a timely manner.
4. Senior accountants who are being groomed as the firm’s future partners, start to question whether they want to commit to a firm that allows clients to take so long to pay.
5. Like attracts like. New clients referred by these slow paying clients will have heard that you carry clients and will expect the same leniency. And if you change the rules for them, they will ask why you allow their mates to take their time but you expect prompt payment from them.
Confrontation is hard. Change is hard. Losing good staff is hard.
Choose your hard!
Script for slow-paying clients
Sometimes if clients are not responding to the requests of your debtors team for payment, the partner has to step in and talk with the client. Please note that this should only be done when the team is unable to secure a commitment/payment from the client.
The following points should be made during this conversation:
1. They are a valued client of the firm.
2. We’ve noticed that you are taking over 6 months to pay.
3. We know that you always pay, however, the payments are well outside our trading terms which are 14 days. We are happy to be flexible but 6 months is far too long.
4. We have had a huge increase in debtor days throughout the firm, so all partners are in the process of calling all clients who are paying well outside our trading terms.
5. If there is a problem, let’s talk about it and come up with a solution together. LET THE CLIENT TALK AND YOU TAKE NOTES.
6. Give them some options. For example, monthly direct debits, fee funding, payments from refunds, prepayments.
7. Get a commitment and action it. Inform the team.
Share this with a colleague.
Contact me if you have any questions.
Have a great weekend!
Image courtesy of Freepik.