Negative WIP and A/R? An Accounting Error or a Best Practice?
I am aware of a firm in LEA (the Leading Edge Alliance) that year after year gets questioned for submitting information to the association’s annual survey that surely must be in error. They will remain nameless but the alleged error relates to their outstanding WIP and A/R balances (or the lack thereof). How can their numbers be zero or negative? It’s just not possible. Is it?
Well it is possible and they have jumped ahead of everyone else in terms of cash flow management by a simple but innovative approach to billing their clients. Most of us will cringe but they have a very simple expectation that is outlined in their engagement letters. They bill a third of their audit engagement fees with the signing of the engagement letter, a third at the commencement of field work and a third upon delivery.
So, two thirds of the fee is billed before the work starts? Yes. As you’re reading this you’re thinking “no way that my clients are going to buy that”! Well, it didn’t happen overnight for this firm and they will be the first to admit that not every single client does it. But what impact would it have to your cash flow if half of your clients did?
The firm that I am talking about has been implementing this (educating their clients) for several years and they have sold it. For instance they have used it as an alternative to raising fees (when they probably would not have raised them anyway) during the recession. It doesn’t happen over night and acceptance will be gradual. Remember I said that they bill it sooner than most of us. Collecting it is where they have eased into it.
Other firms use a similar approach with tax returns where they expect half or in some cases all of the fee with the engagement letter. Do they demand it or do they expect it? There is a difference.
There is absolutely no reason that you cannot implement something similar in your practice. The results will be significant and if you manage it well, over time you will migrate your clients with very little if any attrition.