Adamson Advisory

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.



Five Merger Tips to Help You Seal the Deal

Having completed five mergers while the managing partner of my firm, I learned many lessons along the way and have some of the scars to prove it. There is no question that I was smarter on number five than on the first one. Regardless of whether you are the buyer or the seller, here are few tips that will help you find and seal the right deal.

1. Average Billing Rate.

As accountants we all love to dig into the numbers on a prospective deal as we well should. To save you some time, I have developed one litmus test that should be at the top of your list. It is average billing rate per hour which is simply the billed revenue of the practice divided by the total charge hours. The average billing rate can tell you a lot of things about a practice including level of billing rates, types/size of clients, level of efficiency in performing the work, etc. If there is a significant gap between the two firms you need to quickly dig into why. My experience is that there usually aren’t quick fixes and if the difference is too great you need to take the advice of Alan Boress: “next”.

2. Sacred Cows.

In any combination of firms there is one guarantee and that is change. Typically the seller is coming into a larger firm and should expect to adopt the buyers processes and software. It’s not a democracy and that needs to be understood very soon in the dialogue. Don’t try to take the best of both firms because then no one knows “how we do it”.
I have two suggestions for you that will help both sides get through the change.
First ask for a list from the seller, in writing, of the ”sacred cows”. In other words what things, processes and people can’t be touched. It’s a good step for the seller to do to really know whether they are ready for the change that is coming. It’s also a pretty clear message to the buyer on whether there is going to be a problem or not. If it is a long list, run!
Second, as I indicated above the seller needs to commit to learn the processes and systems of the buyer and the integration needs to happen very soon after the merger date. Good ideas and better processes should always be considered. Just do yourself a favor and consider those for the whole firm a year or so after the chaos of the merger has died down. Continue reading →