by Ian P. Thompson, Senior Manager, Iris Star Practice Management
2020 and 2021 have seen M&A activity drop as COVID got in the way. Now, business is getting past the worst of COVID and the market is heating up. There is pent-up demand to sell and plenty of firms have the cash to spend on buying firms. But do they have enough to spend? A hot market often pushes up prices and firms may need to dig deeper to absorb smaller firms into their own.
What can firms do to boost their cash resources to fund their acquisition plans? Here are five ways a firm can help get more cash in the bank – faster – to fund those growth plans.
Get a grip of your WIP Although more firms say they do daily timesheets, the reality in too many of them is they get less than 100% compliance on this, sometimes much less. If billers know WIP isn’t up to date it will delay them from billing, and the longer it takes to get a bill out, the longer it will take to get paid. Push for this and push hard. You need to find carrots as well as sticks to make this work, but find them you must.
Don’t just stand there – bill it If a job is finished – bill it! This isn’t rocket science, yet too many firms are still experiencing a surge of billing activity at month-end, which may be up to 30 days after a job was finished. Isolate the work you do for clients into specific engagement buckets (e.g. 1040 for 2021) so you can see the detailed WIP for that engagement. When you know it is completed (e.g. filed) then you should be able to bill it immediately. Ideally, your workflow system for tracking deliverables should have a ‘bill client’ milestone as part of the workflow. If it is a fixed fee or value-based fee, you don’t need to wait for WIP, bill it the day the engagement is complete.
Utilization does not equal realization Not all movement is action. A utilization goal is only meaningful if your staff have enough billable hours to keep them busy every day. If they don’t, time can be posted somewhere just to make sure the hours look good. This does not help realize the true potential and profitability for the firm. The focus on realization of someone’s time can often be a more meaningful indicator. However, this must reflect peoples’ effort and not a fee fixed at the wrong price. Even if realization on individual bills can look a bit erratic, your bigger picture will reveal which employees trend to a higher realization across their client base and those who don’t.
Get the debt down Despite the cash flow issues unpaid invoices can cause a firm, many partners procrastinate when it comes to asking clients to pay overdue invoices. In fairness, chasing clients for money is probably not why they wanted to become a CPA. If they are not effective at this, look at getting part-time or full-time collections specialists to help you so you can keep the partners focused on billable hours and finding new work.
But why is the invoice unpaid? Did the bill go out later than when you delivered the work? Do you have a good online payment option to make it easy for clients to pay? By which I mean when you email (yes, email) the bill, does it have a link to ‘pay my bill’ that all they need to do is click on to pay? The more ways you can encourage a client to pay more promptly, the more likely they are to do so.
Lose what’s hurting you In a tight labor market, staff you may have not worried about losing in different times, you are now inclined to keep easing pressure across the workforce and to make sure work is completed. But is all this effort being billed at the right price? Most partners know which clients are in the 20% that create 80% of the work. If that work can be billed profitably, that’s great. If not, then it may be easier to lose a few unprofitable clients than find a good new hire. As with credit collections, the notion of letting a client go is counter-intuitive to many partners who work hard to win clients and worry about how to keep them. Why firms can end up with unprofitable clients is a subject worthy of its own article, but for this article the objective is simple: Tell them they are unprofitable for your firm. Some will value what you do and will be willing to pay more. Some won’t want to or be able to pay more, at which point you have to let them go.
The more you can embrace opportunities to improve cash flow, reduce debt and capitalize on overall realization the more likely it is you will be able to go searching for those M & A opportunities with a bigger budget.