In summary, executive management that supports the broad accounting principles and issues outlined earlier should, over time, build a credible financial foundation as well as strong fiscal footing that will add value to the firm.
Accounting Systems
Accounting systems for professional services firms come in all shapes and sizes. Industry-specific systems, tailored to the nuances of the general requirements of the industry, offer enhancements to facilitate management of financial and operational needs beyond that offered by relatively generic accounting packages such as QuickBooks, Turning Point, Peachtree, Everest, and Microsoft CRM. Although in recent years these programs have been tailored to specific industries such as professional services, in general, they are not scalable beyond a dozen or so accounting employees and may not meet the specific needs of your clients or business. However, these packages can, for a relatively modest investment, meet the basic needs of many professional services organizations until they reach a point where the accounting department exceeds a dozen employees.
After that point, more robust financial packages may be in order, such as Solomon IV, MAS90, MAS 200, Lawson, and Microsoft Great Plains, among many others. Before any system is selected, the firm should prepare a detailed list of its financial accounting, reporting, and budgeting needs, and then use that list to ensure that whatever package is selected will meet all essential and important requirements. Because the total cost to convert to a new system can be more significant than the upfront cost of the software itself,
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time and money is well spent at the outset in ensuring that a package is selected that best fits the firm’s needs within the current budget.
Managing the Balance Sheet
Every executive maintains a certain style and set of managerial tools close at hand with which he or she governs. Because most people can relate to the concept of making a profit, they are reasonably comfortable with it and rely first and foremost on the profit and loss statement (P&L) as their guide to the firm’s financial performance. However, a strong P&L may not necessarily mean that the firm is in a strong financial position because many potential liabilities may be hung up within certain balance sheet accounts. Concepts inherent in the balance sheet require a slightly more technical understanding of accounting, and many executives fail to review it in detail, or at all, and miss many of the key economic indicators of the firm’s relative financial health.
When a balance sheet is well managed, the integrity of the P&L is maintained. Depending on the size of the organization, millions of dollars can be hung up or never recorded on the balance sheet that, if not addressed in a timely manner, can overwhelm otherwise well-managed firms. In this subsection, we address some of those key balance sheet components that should be watched carefully by every professional services firm executive.
ACCOUNTS RECEIVABLE (A/R).
A /R represents amounts billed /invoiced
to clients or customers that have yet to be paid as of the closing date of the financial statements. At a minimum, executive review of three key items is critical: (1) the absolute change in balance from prior periods, (2) the change in balance relative to changes in revenue or other client billings, and (3) the aging of billings to specific clients. The objective of this review is to ensure that all accounts are collectible and that adequate reserves have been established to cover all potential bad debts. Further, and equally important, by conducting regular executive reviews of the aging, staff responsible for collecting invoices are more likely to be proactive in taking effective collection actions sooner if they know management is focused on this key metric. When comparing against prior periods, management should evaluate the change in balance from the prior month, beginning of year, and same period a year earlier to better understand the macrolevel elements responsible for the majority of the change. When reviewing the detailed aging report by client, all extraordinarily large balances should be evaluated as well as any balance over 30 days past due. Many companies today unilaterally extend payment to 45 days knowing that little, if any, adverse consequence is likely to occur by being two weeks past due. However, once a receivable extends beyond the 30-day past due column, some sort of problem most likely exists, such as:
• Invoice is sitting on the desk of someone who may have forgotten
about it.
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• Invoice was never received or is lost.
• Invoice was sent to wrong person and recipient fails to forward it to the responsible person.
• Invoice was sent to the right person, but that person is either on an extended leave or no longer works for the company.
• Invoice contains a billing error or questionable item on it, and client refuses to pay until the item in question is removed from the bill. Even though the majority of a bill is correct, some clients refuse to short pay the undisputed portion under the belief that it will give them more
leverage in correcting the error or questionable item.
• Work was never authorized in writing, and a valid purchase order was never issued even though the client’s representative verbally authorized the work.
• Client is maximizing their cash position.
• Client is in financial difficulty and may not be able to pay.
All of these items, arguably with the exception of the last issue that relates to a client’s creditworthiness, can be managed effectively with phone calls, meetings, and constant follow-up. The longer an invoice remains unpaid, the higher the probability it may never be paid, thus it is critical to the firm’s cash f low to constantly monitor its receivables position. Many of the actions a firm can take to collect amounts owed to it in a timely manner may be intuitive to seasoned professionals, but lower level staff responsible for those collection efforts may benefit from a list of clearly stated objectives and strategies, including many of those listed below. It is important to recognize that each firm is different with respect to the composition of its client base and the volume of invoices issued to each. Accordingly, the following list of collection efforts should be tailored to the appropriateness of each firm’s situation:
• Maintain a consistent billing schedule so that clients know when to expect their invoices and, whenever appropriate, tailor that schedule to dovetail with a client’s accounts payable process. Time the release of your invoices to best coincide with the client’s internal accounts
payable payment schedule, thus minimizing the amount of time your invoice is held within the client’s payment process/system.
• When the promptness of payment has been a problem in the past for a particular client due to routing/approval issues, call the client a few days after mailing to ensure that invoices have been received.
• For larger clients, ensure that your billing and collection personnel know the client’s internal payment procedures, who to contact, and the person(s) responsible for mechanically paying the bills. Development of a close relationship between these individuals can significantly improve the timing and collection of cash, thereby increasing interest income
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and decreasing interest expense. If the client is not located nearby, schedule an economical f light for your billing and collection staff to make a trip to the client’s offices at the outset of the relationship to establish a bond that will yield significant dividends (particularly if the client is large enough and an ongoing relationship is expected).
• Your CFO, controller or top financial executive should know senior financial executives at the client well enough to pick up the phone and discuss any payment delays.
• When practicable, hand deliver invoices that may have unusual items on them, and take a few minutes to sit down with the payment contact to ensure that they understand the issues surrounding the anomaly.
• When appropriate, call the client within 10 days of an invoice due date or before it will roll into another aging category to prompt payment, particularly before an invoice rolls into its first overdue category (e.g., 50
days from invoicing).
• When requested to send invoices directly to the main client, send a list of invoices to the finance contact so that he or she has a summary of invoices sent in order to help track the invoices internally. When requested to send invoices directly to the financial contact, send the summary to the main client to keep him or her aware as well.
• Understand the client’s payment process, and ensure that if POs are required, all invoices are properly matched with their respective POs before mailing the invoices to avoid delays in processing.
• Set the pace of communication by returning all calls within an hour of a client’s returning your call. By setting such a pace, you communicate to the client the importance of your efforts, that you will manage that process in a professional manner, and you inherently appreciate the