If you are a partner or owner of a professional service firm, and you:
- Don’t take regular profit distributions
- Run the business from your bank account
- Have no idea how the business is performing
- Don’t know what the capacity of the firm is and if you do, if you are under or overachieving
- Don’t receive regular management reports
- Are making less than a 25% return to owner from fees
- Always struggle to find money at BAS or tax time
- Don’t have strategic goals or undertake even a basic strategic planning process
Then please read on..
The Cash Tetrahedron™
The diagram I’m about to explain below, derives its concept with fire and what makes fire possible – I think the parallels are excellent, called The Fire Tetrahedron.
Imagine a triangular pyramid – a bottom with three vertical sides. On the bottom and burning in the middle, you have fire. On each of the three vertical sides, you have the three elements needed for a fire to burn, being: heat, fuel (as in material) and oxygen. It’s a little more complex than what I’m describing, but with each of the three elements (heat, fuel and oxygen), a chemical reaction happens and creates fire.
If you take away one of those elements (heat, fuel or oxygen) – then you have no fire. The fire goes out or doesn’t occur in the first place. For example, put water on a fire and you take away the heat, starve the fire of oxygen and out goes the fire, if there is no matter to burn (fuel), then you have no fire.
To have cash in your business, you need each of these elements to be humming; workflow, invoicing, debtors.
What I’m reasoning here, is that these three elements (workflow, invoicing & debtors) are critical to your business having cash. Cash is fire. You need each of the three elements to be present and working (workflow, Invoicing Including WIP and Debtors) to have cash. All it takes is just one not to be working and the cash won’t happen / will be difficult to sustain.
First Element: Debtors
Without a debtor policy and commitment to following the policy, you will almost certainly have a debtor problem (unless you invoice all fees in advance). Professional service firms are not essential services (we can’t turn off the power or phone) and thus, we can be easily pushed back.
- What is your debtor policy? Do you have one? Or do you just work from the 60+ or 90 day + column?
- Do you look at your debtors only when you have no cash? That is, are you a debtor reactionist
- You need to have a system for following up debtors. Without question.
- Sure, you may circumvent debtors by fixed fee and agreed payment methods, half fee upfront, etc. and if that is the case, then well done!
If you don’t have a policy, then create one, and assign someone in the firm to be responsible for the policy.
Creating the Process:
- What happens at 15 days, 30 days etc?
- Create email and phone scripts for each of the above days
- Have an escalation point… does it go to a partner at 45 days?
- When do you threaten to sue?
- Have the policy complete, communicate it to the team, measure the process (and those responsible) and watch your debtors improve.
Debtors within a professional service firm can be de-risked by having a policy at invoicing (before it becomes a debtor) where 50% at least of the fee estimate is requested before work on the matter begins and the remainder upon completion of work and before being released. This may seem hard, but so many engagements within a professional service firm are once off, why expose yourself to unnecessary bad debtor risk?
Second Element: Invoicing (Including WIP)
WIP is about accountability. Management icon Peter Drucker had a saying, along the lines of ”what you don’t (or can’t) measure, you can’t manage.” This is true with WIP and is irrespective of how you invoice. Its about measuring and managing the input. With regard to WIP:
- Do you monitor your WIP and unbilled expenses to clients
- Have a firm wide, known policy for WIP management?
- Do you record WIP correctly?
- Have a culture of fixed fee, so no WIP? If so, how do you know if you are under or over achieving?
If you are not in control of the performance of your firm and cash is difficult to come by, WIP is something you need to understand and control. You should be allocating raised invoices against something (WIP) and measuring performance at a firm, team, individual and job level. Make sure your WIP is realistic. Write off what can’t be recovered. Have recoverable WIP, so you can measure and plan.
It’s a big question, but how do you invoice? The bigger question, can you point me to a procedure that has documented how you invoice right from scoping the work through collecting the debt? There should be checklists, templates, draft emails, etc
- Do staff know how to invoice and what the process is?
- Do clients know what to expect at the start of a matter?
- Popular options for invoicing seems to be:
Hourly rate from time sheet entries
- Fee estimate; fixed fee, that is, the fee is fixed up front and then at agreed intervals, invoiced to the client. Intervals could be some or all upfront, some or all at completion and anything in between.
- Success-based invoicing
- Value based fees, which means some assessment to be made on the value of the work being produced and not the time that goes into producing that work, to be quoted upfront and charged to the client.
If nothing else, it’s important to:
- Have a firm wide policy on invoicing, which includes quoting to clients
- Invoice clients promptly once work is completed
- Give the clients a fee guide and/or ask for an amount upfront. In what other industry, can people unknown to a business, come in and request services, which most likely will be a once off, and then they don’t need to put money upfront for what could be a $5k, $20k or higher value project? I think for an unknown client (at the very least), you are entitled to ask for 50% of the estimated fee upfront, to be paid, before you start the work.
Third Element: Workflow
Our, the most important element of the Cash Tetrahedron™. Important because it concerns how efficiently your team produces their work, driven by the firm’s systems and processes and team structure in place to support this.
Questions to ask yourself:
- Is your organisational structure flat or do you have levels? (junior through to senior)?
- Do you leverage work to the appropriate level?
- Do you have templates and processes for how to create your work (especially standard work)? We call this a workflow map.
Do you have a workflow map, that everyone in your office follows? A workflow map could be an end to end map, from when the client/matter is first referred right through to the debt being collected. The workflow map should be electronic, with templates, checklists, next steps and should be easily updated. It should be the way of working in the firm. Anybody should be able to ‘plug in’ and see the next step or the template email to use for the next task. Can a staff member check into that map and figure out what’s next? Some features / likely headings of such map:
- Referrer thanked for the matter
- Check conflicts of interest
- Credit check
- Scope of work
- Engage client (fee estimate, billing guidelines etc)
- Add client / matter to crm system
Planning Legal Work:
- Processing the work
- Dealing with stakeholders (clients, other side, etc)
- Resource allocation
- Tracking work
- Discussion with clients
- Debrief with staff
How often are your workflow templates being updated and improved?
A workflow committee could be formed, that meets and updates the map, so its constantly being tested, improved and updated, allowing for transparency across the firm. That way, as people come up with new ideas or templates or checklists, the idea is tabled via the committee and if approved the team are notified and the new way/procedure/checklist is updated in the workflow map
If you are writing time off jobs and don’t know why? Could it be:
- You have the wrong mix of team members doing the job?
- Your systems and processes aren’t providing you staff with shorter, better ways to complete work (who are often at a lower charger rate)?
In a professional services firm, one of the main ways to make money is leverage. Sure, for specific jobs, you may have a higher charge rate person doing the work and its all recoverable, but is it sustainable? A mix of junior through to senior rates on a job seems to make sense and will be more efficient for the firm and the client. I think it’s a sustainable competitive advantage.
Some signs your workflow process may need an overhaul:
- Your write offs are excessive
- Your team structure lacks leverage (ie. Work being completed by people who shouldn’t be doing it)
- Mistakes occur that shouldn’t, too often
- Are there to many people involved?
- Is paper going everywhere, is print being hit on everything? (what’s your electronic system like? Does everyone have three or four screens)?
- What is your record retrieval process?
- Work taking too long?
- Scope creep
- People (team members) always waiting
- Capability gaps
- Queries taking too long (to either be answered or actioned), emails not being answered/taking too long (by clients or team members)
- Are files/matters sitting for too long before they can be allocated
- Time taken to find files is too long
- Too much travel
- Producing what should be a templated document taking too long, too much labour going into something
The Cash Tetrahedron™ Caveat
Underpinning the Cash Tetrahedron™ of your firm, is your firm’s capacity to produce fees, in terms of the financial metrics possible by your team. You need to understand the billing capacity of your team, before you worry about the Cash Tetrahedron™. Understanding the capacity of your firm does link into the following:
Individuals, teams and the firm knowing what is required of them from an input and output view:
- Time being recorded to measure input
- Comparing the gap between billings and capacity
- Tracking a budget built from capacity metrics
If the following statement is true, then using The Cash Tetrahedron™ can be the next step in your firm achieving better cash flow.
The Cash Tetrahedron™ is a guise for having systems and processes. Systems and processes around workflow, invoicing and WIP and debtors. The idea of the fancy name and analogy drawn is to help you focus on what is important. With the above discussed, you then need financial accountability.
In our view, to help you manage the financial performance of your professional services firm, we strongly encourage the use of a KPI dashboard, updated weekly. This dashboard should be easily updated internally, and be highly informative with the key indicators that impact your business. It may take some time to understand what the key indicators for you business are and sometimes these should follow what your strategic plan is (if you have one). Further, it’s a great way to track, on a weekly basis, how the business performs. Some examples of what you track:
- Cash at bank
- Fees YTD
- Fees Last Week
- WIP Partner
- WIP Aged
- Debtors Total
- Debtors 45 days +
- Debtors Partner
- Debtors Aged
- Productivity per Professional
- New Matters
- Marketing Program (Leads received, website hits etc)
An important part of taking financial control of your professional services firm, is to have accountability on the financial performance of your business. This role could be filled by a managing partner, CEO, external consultant or external accountant. Its important the financial metrics and the firms performance is reviewed and challenged on a regular basis.