They are the perennial problems that faces every professional services firm … how to reduce lock up and improve financial performance?
It’s a circular argument with every piece of the jigsaw so interconnected that almost every firm struggles with the process. You choose to penalise people for WIP write-offs and find that employees and fee earners stop recording all the time… Suddenly you are surrounded by people who are working 50 hour weeks and yet there is only 30 hours going into WIP!
So what’s the answer?
We were recently asked by a specialist division of a top-10 accounting firm to come in and help with the departments financial performance. Turning over £16 million they were the most profitable part of the firm and had a gross margin of almost 50 percent, yet the chief executive and finance director were frustrated by their poor financial performance. You may ask how?
The challenge was in the amount of work in ‘lock up’. We found that work in progress had remained unbilled for an average of four months, and astonishingly their receivable income was way behind by five months. This gave the division a combined lock up of some 288 days and created a burden on the firms cash flow and working capital resources.
The problem was essentially Twofold: One, contract terms and two, asking to be paid.
Many of their contracts had historically been agreed based on producing an invoice on completion of reports being sent to the client. As contracts were often very complex and involved international business a culture had developed where the people working in this team became accustomed to invoicing terms that required 50 percent payment upon a draft being completed and 50 percent when the client approved the completed version.
This scenario is not an uncommon factor in many other firms!
The new fee earners came and left the team, everyone in this department had simply accepted that these were the contract terms that should be applied and carried on the same practice.
Despite the fact that there were good examples of people in other terms negotiating revised contract terms with their clients and were able to invoice on a variety of different bases – over 90 percent of those in this team never thought to challenge the status quo and the lock up was now dragging down the rest of the firm.
theGrogroup was appointed to work with the fee earners of this team and investigate how to reduce lock up. A number of positive changes were agreed.
Asking to be paid
The common mistake that every qualified professional, whether a lawyer or an accountant or an architect makes is that having worked solidly, with integrity, with the interests of your client at the core of everything you do… Fee earners still believe that they are only entitle to be paid once they submit the final bill and the client is happy.
This is simply not the case.
Anyone in business, or at least any of our clients, will know that the people who shout loudest get paid first. It is simply the way of the world.
We interviewed a finance director from a large plc and the subject of working capital and cash flow management cropped up. Sitting on the other side of the fence we asked how they paid their professional advisers and were surprised to hear their response “well that’s a funny thing… they send us these bills but never asked to be paid. Each month we have more creditors than we have cash and so we tend to pay the people who ask for the money… I have begun to wonder morally whether this is the right thing to do… But as they don’t seem to be that keen to be paid, it means I don’t worry all that much about working capital management…”
When understanding how to reduce lock up, this is a salutary lesson that every fee earner needs to understand and take heed.
Asking for the cash
This is all about confidence. Confidence in the work that you do being worth the value that you charge, and also practice in being able to pick up the phone to a client and discuss their business, how things are going… Oh, and to mention that our last invoice remains unpaid, just in passing. You never need to ring the client and “chase for payment.”
Over the course of the short and highly effective project that we ran with this client we were able to initiate a range of powerful and effective measures to reduce their work in progress and drive over half a £million of cash into their business.
One of the senior partners present commented “That was an incredibly powerful session. I thoroughly enjoyed it and very pleased that there are concrete actions we can take to rectify the lock up situation in this team.”
If you want to learn more about how to reduce lock up and release cash to invest in the growth of your business please contact us to arrange a meeting to discuss your challenges in confidence. Trust us, everybody is in the same boat!