Cash flow within A/E firms, as nearly everyone knows, can be difficult. In some cases, firms must rely on their credit line 365 days a year, year after year, without ever paying it down. In today’s lending environment you run a great risk. Your bank may shut off a firm’s credit line if it is always extended.
The key to cash flow – and managing a credit line as it was intended to be used – is collecting client payments. That’s an obvious statement everyone understands. However, the challenge is to determine the factors that impede cash flow. Here are some of the most common reasons (there are many others).
Far, far too often firms cannot or will not issue invoices to clients on a timely basis. This old-fashioned approach must be corrected. Timely invoices are a sign of a professional firm. More importantly, it is part of the contract terms. Nearly every contract I see spells out billing and payment terms, yet firms ignore the terms and invoices are sent infrequently. If your contract says you will invoice monthly, then invoice monthly.
Simply put, there is no reasonable explanation for not billing your client on a timely basis. A professional firm always generates invoices consistently and on time. Your client expects and probably prefers it. Believe it or not, some may be waiting for you to send a bill so that they can pay it!
Not Billing Modest Amounts
Don’t be shy. Nobody really minds getting an invoice for a small amount — and sometimes its better. Send an invoice for work done in any month. Sending an invoice for a few hundred dollars (or less) communicates not only that your client owes you money for professional services and expenses, but equally important, it communicates that the project is moving forward.
An invoice also reminds the client of any other unpaid invoices they may owe you. It could be the nudge a client needs to issue a check.
And if you think about it, this relates to Delayed Billings too. Say you have a $10,000 project. A client would probably prefer (and pay faster) 10 invoices for $1,000 each rather than one, two or three large invoices. Yes, your client will pay the whole fee, but sometimes owners and CFOs (managing their own cash flow) find it easier to disburse monies in smaller amounts.
This one is easy. Don’t overbill your client. When you do, it brings everything to a grinding halt. It also brings into question other invoices that are completely accurate.
Project Managers, Collections and the Client Relationship
The client relationship is perhaps the hardest thing for project managers to understand and in particular, how the relationship changes throughout the project life. When a project is awarded, it is clear that you are working for the client and you want to make them happy. The client is the master in the relationship and you are the servant. The problem is many project managers cannot move beyond this mindset.
The relationship changes once an invoice has been issued (and assuming no overbilling and the project is on track). You provided a service and the client is obligated to pay you. In effect, where collections are concerned, the client is the servant and you are the master in the relationship.
When a client owes your firm money, the project manager must assume the master role in the relationship. The client should be reminded of the contract terms and that payment is expected. Of course, communications must be professional and based on mutual respect, but you cannot shy away from this responsibility. Most clients certainly intend to pay you. Often clients forget about your invoice or simply have not gotten to it yet. A professional call reminds them, and most clients do not mind being asked about the status of a payment.
Risk to cash flow and to a line of credit increases when a project manager thinks of themselves only as the servant in the relationship. This causes you to hesitate to call the client. You assume that asking for money is rude or too bold. You might avoid making calls because you think it is unprofessional (actually NOT calling is unprofessional). Avoidance also may set an image with a client that your invoice is not a priority. If you hesitate or avoid the situation, you may wait a long time for payment. That delay increases your risk.
So, call your clients, be professional and ask to be paid. They owe you the money. And most of the time the work was done and there is no reason to delay.
These simple steps do improve cash flow. Many of my clients and others I’ve talked to use them. I share them with new and current clients regularly. Taking actions like these demonstrate your professionalism and that you hold the client relationship in high regard.
To fulfill their responsibilities, it is important that your project managers have the information they need. ArchiOffice, EngineerOffice and BillQuick can give your project managers this information. In ArchiOffice and EngineerOffice a project manager can see which clients are current and past due on their Contact List. In BillQuick, my clients filter the Aging Report by Project Manager. Most also use the Agent Workflow Automation module to run the report daily or weekly and automatically email it to each project manager. Unfortunately for my other clients using older legacy accounting systems, it is harder to get information to project managers. Secure access is one issue. Another is some systems can’t filter by project manager and data has to be manipulated in Excel. This takes time, delaying the information. These issues too often result in collections being left to the accounting staff.
That is a bad practice.
Clients respond better to a payment request from the project manager. Remember, the all-important personal relationship is between the project manager and the client, not between the accounting staff and the client.
Poor cash flow is usually not due to poor project management or substandard work. It is most often due to poor or avoided communications between the project manager and the client. If your office relies upon accounting staff for collections – if you allow project managers to avoid getting their hands “dirty” with collection calls, then your office probably experiences cash flow problems. Cash flow problems increase risk to your line of credit.
My advice is get the tools you need. Bring in the right person to help your project managers understand their relationship with the client and how to comfortably and professionally talk with clients about past due invoices.
After that, call your clients. They won’t mind.
[Note from the editor: Many firms set their payment policies and inform clients about them at the start of projects – in the contract and verbally. A common policy is work on project is put on hold when an invoice becomes 60 days past due. The procedure usually runs like this:
- At 31 days the accounting clerk calls the client.
- At 45 days the project manager speaks to the client. He or she notes that work may be halted if the invoice is not paid. The client is referred to the contract and reminded about their pre-project conversations.
- At 60 days the project manager or owner calls the client and says work has been halted until payment is made. The client is told they will be put back into the schedule once outstanding amounts are paid.
When you combine this with what the author recommends to his clients, the results can be even better.]