Philip Campbell's Blog

Why Does My Cash Flow Suck?

Ever wonder why cash seems so tight all the time? Your business is doing well, but it feels like you are riding on the edge when it comes to cash (and cash flow).

Every business owner or entrepreneur goes through it… usually many times along the path to growing a successful company.

Shining a Light on the Issue

A lot of the confusion and frustration starts with the fact that profits Do Not Equal cash.

At least not in the short term.

There are 5 to 7 key drives of cash that could be the reason cash is so tight right now. The question is do you have a way to quickly shine the light on the driver of cash that needs attention.

Here's a fun conversation between a business owner and their outside CPA that highlights the issue.

Business Owner: Why does my cash flow suck?

Outside CPA: Your cash flow sucks because you have an average of 76 days of sales sitting in your receivables. That's way too high in your business. Something is out of whack.

Business Owner: Holy cow, you're right. Accounts receivable, which should be a very small number, has gone through the roof. I thought we had the receivables under control. About a year ago accounts receivable had skyrocketed. So we put a special focus on it last year and got it under control. I had Jane in accounting spend almost full time on getting accounts receivable down.

After your email, I talked to Jane in accounting. She thought that after the cleanup work had been done last year that responsibility had gone back to John and Steve in project management. So I talked to John and Steve in project management, and they said no, they thought Jane in accounting was going to be continuing to do the work to collect receivables.

So the bottom line is no one's collecting receivables.

I just pulled up the accounts receivable aging and there it is. Our aging has gone crazy. Thank you so much for pointing that out. I guess one lesson for me is I should pay attention to whether we're collecting receivables!

I've been focusing on getting new deals and creating revenues and profitability, and it has been going great. And I was perplexed as to why it is that we don't have enough cash to pay vendors. We'll get on it right away and fix it.

Shining the Light on Cash Flow

Like this discusion highlighted, there's a good chance there is one driver of cash that is creating your problem. So the big question is which one is it?

Profitability, accounts receivable, inventory, accounts payable, capital expenditures, debt service, owner distributions, prepaids and deposits?

Which driver of cash flow needs to your attention this month?

Read this post on understanding the different drivers of cash. It will help you shine the light on the area that needs your focus.

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Getting Paid Faster in a Professional Services Firm: A Semi-Radical Idea to Consider

In my last post, I talked about the semi-twisted world of hourly billing in professional services firms.

I used a law firm in my example to set out what a client has to go through every month to review and approve an invoice based on time incurred. It's a brain draining process for the client that, among other things, slows down the payment of those invoices to the firm.

At the heart of the problem is the fact that:

• The client does not know their cost before the engagement begins
• The focus is on time/effort incurred
• Time incurred isn't known until a month or more after the time is incurred
• To determine if an invoice is accurate the client has to consider whether the time incurred seems reasonable, whether the worked performed seems necessary, whether the people involved seems reasonable given the type of work performed, and that their individual rates are in line with what they expected
• … and a lot more

A Baby Step in the Right Direction

Now for a possible solution that could make the client feel better and speed up the payment of the invoice at the same time.

I'm not going to make the pitch for flat pricing, value pricing, alternative billing, etc. All of which have merit in many circumstances. But all of which would be met with such intense resistance that the default would be to do nothing.

Since my mission here is to help create a possible solution, I'm going to assume you have no desire to change you're billing by the hour model. But that you are interested in trying to get paid faster and make clients feel better in the process.

Here's What Other Companies Are Doing

Let's take a quick look outside a law firm to see how other companies help their customers feel like they are involved in the products and services they buy from them.

Credit card companies – I set an alert for my credit card so that anytime a charge is made, but the card is not present, I get an email to alert me. It tells me what it was used for, the vendor, and how much the charge was. That way I can call them immediately if the charge was fraudulent. I don't have to wait an entire month to find out something was charged on my card that I did not authorize.

Banks – I have my bank accounts set up so I am alerted to large activity and when the balance goes above or below a certain level. I don't have to wait until the end of the month to know what's going on. And I don't even have to go to my account online to see it.

Amazon – I buy lots and lots of books at Amazon. I love business books. Amazon sends me a txt message as the package progresses from the warehouse to the various delivery sources all the way until it is delivered at my door or in my mailbox. They let me know how the "work" is progressing toward getting me what I ordered.

Domino's Pizza – Domino's has a tracker that will let you know where your pizza is in the various stages from being prepared to being delivered. People actually get a kick out of knowing what's going on along the way.

Reliant Energy - My electricity supplier is Reliant Energy. This is an interesting example because I don't know how much my electricity will cost before the month begins. They basically use the hourly billing model. Rate x usage = my cost.

Here's how they keep me updated on energy usage during the month so the bill is not a surprise when I get it.

Reliant offers a weekly email service that provides information about my electricity usage. It estimates what my usage for the month might be, compares usage to last week, and even compares my usage to my neighbors. Here's how they explain the service and its benefits.

I love the bullet that says "Empowers you to make decisions based on summary information – before you receive your next bill".

And I like the next bullet that says "Eliminates surprises on your bill by informing you what you're spending from week to week and providing estimates of your next bill".

I bet law firm clients would value that same kind of information.

Here is a portion of a recent weekly email I received so you can see some of the information it provides.

I can also go online to my account and see my electricity usage for any timeframe. Is it overkill? Maybe.

But they are making a statement by providing a transparent view into my usage pretty much as it happens. I appreciate the fact that the service is available so I can look at it if I choose to.

Could a Law Firm Do Something Similar?

What if a law firm had a similar approach to making time incurred and work performed available so a client could better understand and monitor it each day or each week?

Would the client appreciate the visibility? Could the client ask questions during the month rather than waiting until the month has ended and they receive the invoice?

Would it be easier for the client to participate in the process and feel like they are involved?

Here are a few of the benefits in my view:

• Clients might like it and feel less surprised when they get the invoice (which could translate into faster payment)
• Daily time tracking within the firm would become the norm (it would be self-policing). Right now most firms have a week or more lag time between when time is incurred and when it is actually recorded in the time tracking system.
• Better visibility to upcoming billings within the firm (more accurate billing and cash flow projections)

Sure, there are probably lots of issues to overcome in providing that kind of transparency for clients. But it's hard for me to imagine that it would hurt client relations or slow down payment. It sounds to me like a low risk, lots of potential upside, kind of process to consider.

One baby step for a firm to consider is pick a couple clients that are slow payers and that complain about their bills a lot. Then manually provide them twice a week email updates on time and work incurred. You will probably know in short order if they like it or hate it… and whether it improves client relations and trust and speeds up their payment.

Some people will point out that many time and billing systems in law firms (and most professional services firms) are old and could not provide web access or automated emails. Good point. Maybe that's part of the problem.

But the larger question is whether professional services firms could get comfortable providing daily visibility and transparency into their time and work incurred. I'm sure the debates would be lively!

I'd love to read your list of issues or obstacles in the way. Given that my last post generated some hate mail (although fairly polite hate mail), I know lots of people will think my idea is dumb. That's OK. Share your thoughts with me anyway. It's always helpful to hear both sides!

I'd also love to hear from you if you think the idea seems like a reasonable and effective solution (or at least a baby step in the right direction).

Email me your comments.

Firms that Bill by the Hour are Stuck Between a Rock and a Hard Place

Professional services firms that bill by the hour face some very unique challenges.

The accountants and bookkeepers responsible for creating invoices and sending them to clients have a uniquely challenging job inside a professional services firm. Each month they beat their heads against a wall to gather time incurred and bill clients.

Nobody likes the process. The lawyers don't. The accountants and legal administrators don't.

And clients don't like the process or the result!

So why has this same process gone on for years and years you ask?

The Two Big Problems

Two realities are working together to create the problem.

1. Clients don't know what the service will cost at the time the work begins (unlike most things were you agree to the cost upfront)
2. Professionals don't like to track their time (so they delay, procrastinate, provide vague descriptions of the work performed, etc.)

A Law Firm Example

Let's see what the two realities (issues) look like in a Law Firm.

Reality #1

Here is the highly summarized discussion between a prospective client and an attorney about doing some legal work.

Client: How much will it cost?

Atty: I'm not sure, it all depends

Client: Hmmmmmmmm

Atty: We bill based on time incurred

Client: Oh. Hmmmmmmm

Atty: Our rates vary between $145 and $345

Client: Well, I need to resolve my legal issues

Atty: Ok, let's get started

The interesting point here is that he work begins even though the client does not know what it is going to cost him/her to get the job done.

Reality #2

When the month is over accounting cajoles, threatens, begs and pleads to get the lawyers and paralegals to complete and turn in their time reports and descriptions of work performed.

That process is harder (and more frustrating to the admin staff) than it sounds!

After some time passes and enough begging takes place, accounting gets the information and prepares the invoices to send to the client.

(In another post, I'll comment on whether it is "actual" time that is being billed when professionals have to go back and do their time reports for the past week or month. It sounds more like an "estimate" to me. But that's a subject for another post.)

Now the Client has the Bill/Invoice

First the client has to figure of whether the invoice is accurate.

Here's what the client walks through in their mind as they review the legal invoice they just received.

• How much time did they spend?
• What did they do?
• Who all did the work?
• What was each person's hourly rate?
• Are the hourly rates accurate?
• What other "stuff" did they bill us for?
• Was the work they did really necessary?

Second, the client has to come to a conclusion in their mind about out whether the total dollar amount of the invoice is fair.

• What value did I receive?
• Does the amount seem fair?
• If not, which part is unfair or inaccurate?
• Who should I call to complain or try to get an adjustment made?
• What amount would be fair?
• Should I approve the invoice for payment?
• When should we pay it?

And the client goes through that process every month that they receive a legal invoice. Yikes!

I'm willing to bet that 80% to 90% of what the client thinks through with every legal invoice drives from the fact that they did not know the cost before the work began. Most of the "value proposition" back and forth discussions would have been fully discussed and considered before the work started.

When the "value" discussion comes after a monthly invoice, it slows down the payment process big time. It throws sand in the gears of collecting receivables.

Is the solution flat pricing, in advance? Maybe. That certainly creates its own challenges though.

I Have an Idea That Will Surprise You

Being an experienced CFO, and having the luxury of seeing this problem both inside and outside of professional services firms, has led me to an idea that might solve the problem.

And it has nothing to do with flat pricing, alternative billing methods, or value pricing.

The idea comes from the likes of Reliant Energy, Amazon, and Banks everywhere… even Dominos Pizza.

This could solve the problem for professionals, accountants within those firms, and the clients they serve. A true win-win-win.

I'll share that vision in my next post.

Stay tuned! You're either going to love it or hate it. J

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Free Webinar: Understanding Your Cash Flow – In Less Than 10 Minutes

On April 14, 2014 at 2:00pm CDT, I will be participating in a webinar with Kahuna Accounting. I'll show you how to simplify the process of understanding and managing your cash flow. (I know you're shocked to hear I'll be preaching and teaching my cash flow message!)

1. I'll show you how to understand your cash flow in less than 10 minutes, and
2. I'll show you how to explain what happened to the cash in your business last month (to your spouse or business partner) in a 2-minute conversation

And it's FREE.

Can you quickly answer what happened to the cash in your business last month?

Most business owners can't. And they feel bad because they can't. Well, that's all about to change.

In this webinar, you will learn how to:

• Understand your cash flow in less than 10 minutes each month
• Pass The Spouse Test (a 2-minute discussion with your spouse or business partner and they will understand your cash flow – and you will look smart in the process)
• Put the Cash Flow Focus Report to work in your business (this is the secret)
• Avoid the single biggest mistake business owners make with their cash flow
• And more…

Imagine being in complete control of your cash flow every single month… and freeing up more of your time to focus on the fun stuff like taking care of customers and growing your business (not the boring financial stuff).

This webinar will show you how. And it's FREE. 

Click here to Sign Up now and see for yourself.

See you online on April 14, 2014 at 2:00pm CDT.

 

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Would You Live in a House With No Windows?

Running your business without cash flow projections is like living in a house with no windows.

A house with no windows is almost identical to a house full of windows.

• You can still relax and enjoy TV.
• You can still cook delicious meals and entertain guests.
• You can still get a great night's sleep.
• You can still make sure the temperature inside is at a comfortable level.

But… you would quickly say to yourself… This Sucks!

This makes no sense.

This is uncomfortable on my brain.

I have to walk outside to see what the weather is like. On a beautiful day, you would feel like a dunce for living in a house with no windows. And for good reason… you should feel weird purposefully living in an atmosphere like that.

Same thing if you are running a business without a view through your "financial windshield".

Lack of a forward-looking view of financial results turns smart entrepreneurs into mediocre entrepreneurs.

It also makes fraud much harder to catch because the people running the business haven't taken the time to consider what the results should look like. (Actual results should always be compared to what was expected to happen financially.)

And in case you didn't already know this, it's the accountants and bookkeepers that steal money and commit fraud. Partly because it's so easy when no one is paying attention to what the results should look like.

Your House with No Windows

If you don't have a view of what next month's financial results are likely to be, I encourage you to rent a house with no windows for a month.

Why not? It makes as much sense as running a multi-million dollar business without a view through the financial windshield. J

Click here to get my blog posts delivered right to your email inbox. I publish one new post each week. (Privacy Policy: I will NEVER rent or sell your email address and you may remove yourself from this list at any time you choose.)