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Accounts Receivable Collections
Collecting for work performed is viewed as an uncomfortable
responsibility for many professionals. It involves discussion of dollars and
services performed. Many professionals avoid the collections process as long as
possible.
Planning and communicating your method of collecting will result in
stronger client relationships and fewer problems. A pre-determined process that
is communicated to clients will prevent surprises and result in faster payment.
Specific collection procedures and action must be addressed throughout
the life of projects and include:
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GO/NO GO Decisions
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Contracting
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Project Set-up
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Project Initiation
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Project Implementation and Execution
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GO-NO/GO Decisions
Research the client’s ability to pay and previous payment history.
Utilize outside sources such as Dun & Bradstreet. Obtain copies of the firm’s
financial statements, have discussions with suppliers, review Internet sites,
understand banking, legal and accounting firm relationships, etc. These and any
other information you can obtain are valuable in assessing the firm’s credit
worthiness and past reputation.
Contracting
Collecting issues must be considered in the contracting process.
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Obtain deposits and/or retainers from clients. Deduct deposits from
the last invoice. Standard contracts should include one of these clauses.
(However, if required the individual negotiating the contract can insert
$-0-.)
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"Deposit - Upon Execution of this Agreement $______ shall be
paid by "CLIENT" to "ENGINEER" as a
deposit on work performed. This deposit will be deducted from the final
invoice."
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"Retainer – "CLIENT" agrees to pay "ENGINEER"
a monthly retainer of $______. A monthly accounting will be provided to
"CLIENT" disclosing the difference between retainer and
cost of services performed".
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Include proper payment term clauses in your contract. Examples are as
follows:
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"Billing and Payment (from "ASFE Contract Reference
Guide – Third Edition" – Page 28 & 29) CLIENT recognizes
that timely payment of CONSULTANT’s invoices is a material part of the
consideration CONSULTANT requires to perform the services indicated in
this AGREEMENT."
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CLIENT shall pay CONSULTANT for services rendered in U.S. funds
drawn upon U.S. banks, in accordance with the rates and charges set
forth herein. Routine invoices will be submitted by CONSULTANT from time
to time, but no more frequently than (every two (2) weeks, and shall be
due and payable within (thirty (30)) calendar days of invoice date. If
CLIENT objects to any portion of an invoice, CLIENT shall so notify
CONSULTANT within (fourteen (14)) calendar days of the invoice date,
identify the cause of the objection, and pay when due that portion of
the invoice not in dispute.
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CLIENT shall pay an additional charge of (one-and-one-half (1.5)
percent (or the maximum percentage allowed by law, whichever is lower)) of
the invoiced amount per month for any payment received by CONSULTANT more
than (thirty (30)) calendar days from the date of the invoice, excepting
any portion of the invoiced amount in dispute and resolved in favor of
CLIENT. Payment there after shall first be applied to accrued interest and
then to the principal unpaid amount.
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Payment of invoices is in no case subject to unilateral discounting
or set-offs by CLIENT.
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Application of the percentage rate indicated above as a consequence
of CLIENT’s late payment does not constitute any willingness on
CONSULTANT’s part to finance CLIENT’s operation, and no such
willingness should be inferred. If CLIENT fails to pay undisputed invoiced
amounts within (thirty (30)) calendar days of the date of the invoice, as
set forth hereinabove, CONSULTANT may at any time thereafter, without
waiving any other claim against CLIENT and without thereby incurring any
liability to CLIENT, suspend this AGREEMENT (as provided for in Section
____, SUSPENSION) or terminate this AGREEMENT (as provided for in
Section____, TERMINATION."
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Include a sample invoice (and supporting documentation, if
applicable) agreed to by your client as an attachment or exhibit to the
contract. This will avoid confusion about the format needed to facilitate
timely payment. Do not wait until the client calls stating "this format
does not meet our needs".
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Avoid "Pay When Paid" clauses. If the clause cannot be
avoided establish a threshold that decreases your exposure. The "ASFE
Contract Reference Guide – Third Edition" discusses this on page 116
as follows:
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"CONSULTANT’s invoice will be approved and presented by
CLIENT to OWNER. CLIENT will pay CONSULTANT amounts due promptly after
Owner pays CLIENT. Notwithstanding any action or inaction by Owner,
CLIENT warrants that all of CONSULTANT’s undisputed invoiced amounts
will be paid within (sixty (60)) calendar days of the invoice
date."
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Avoid Retainage provisions. Retainage refers to clients holding a
fixed percentage of your progress payments until completion of services.
This is reasonable for construction contracts. Such provision is not
reasonable for consulting services contracts. The provisions should be
deleted from a consulting service contract. If this is not possible,
establish reasonable thresholds to obtain reimbursement of retained funds
based upon time periods, milestones or other factors that promise payment is
received as soon as possible after the threshold trigger is met. Page 128 of
the "ASFE Contract Reference Guide - Third Edition further discusses
this.
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Obtain agreement on how to handle changes. Present the client with a
process including sample change documentation and include as a contract
attachment or exhibit.
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Project Set-Up
During this stage of a project, appropriate information must be recorded
to make sure invoicing is accurate and timely. Revenue must be recognized and
billed in accordance with the contract.
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The invoicing format must be noted so the client is not surprised and
receives the format required.
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Disclose the date your client needs to receive the invoice. (This is
especially important when working as a subcontractor) Some clients will not
pay you until they are paid. If they mail their invoice to their client on
the 25th of the month, be sure you get your invoice to them in
time for them to include your invoice with their billing.
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Note who and where the invoice should be mailed.
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Include telephone contact numbers regarding payment questions.
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Project Initiation
Begin every project with a kick-off meeting. Included in this meeting,
whether face-to-face or telephone, the discussion of billing and collection.
Items you need to clarify at this meeting are:
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Invoice format
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Supporting documentation format
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When to invoice
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Who and where to send the invoice
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Who to call with any questions that may arise about payment
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Project Implementation and Execution
Once the project work begins and throughout the project, the schedule and
budget must be regularly reviewed and managed. Make changes and corrections as
soon as possible and do not wait until invoicing. Communicate and document
changes as soon as possible—preferably before any work is completed on the
change.
Billing Process
Do billing as soon as possible and not later than monthly. Promote an
attitude of "How do we bill for the work we do?" instead of "How
do we avoid billing?" The ultimate responsibility for billing and
collection should be assigned to Project Management. However, if possible,
assign someone separate from the Project Management to review and report the
status of billing and timeliness of collections. Monitor days
sales in accounts receivable and work to reduce days to less than 75.
The overall attitude promoted should be "How do we bill for the work
we have accomplished" and to accomplish this as soon as possible – the
only way to get paid is to get the invoice to the client.
The following procedures promote prompt billing and collecting:
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Accounting should provide Project Managers with billing sheets 2-3
days after end of the established billing period.
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The Project Manager or their designee should review, change, approve
and return the billing sheets to accounting within 2 days after receipt.
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Accounting should finalize and mail the invoice within 2 days of
return from the Project Manager.
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Large invoices should be sent by over-night mail to the client.
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The Project Manager/Accountant or other designee should call the
client 5-7 days after mailing to confirm receipt of large invoices and first
time mailed invoices.
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Aged unbilled and billed account receivable listings should be
distributed biweekly to Project Managers. Someone separate from Project
Management should be assigned the responsibility of monitoring accounts to
assure timely collection.
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The Project Manager or their designee should call clients who have
not paid within 5 days after the contract payment terms.
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Accounts over 60 days past due and over a pre-established dollar
amount should be listed on an exception report and issued to upper
management.
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Depending upon the contract terms and conditions and reasons for
delinquent payments, specific actions should be taken as accounts become
past due. As invoices age, actions should strengthen. Examples are
management calls, formal letters, liens, withholding deliverables, use of
outside collection people, stopping work, mediation, arbitration, lawsuit,
etc.
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Your company should monitor your days revenue in accounts receivable. The
following formula computes this:
Average
Accounts Receivable
Total
Revenue/365 days
The Average Accounts Receivable should include both unbilled and billed
amounts.
Days experienced by companies working with the following type clients
are:
Type of Work
Typical Days Experienced
Government – As
Prime
60
Private Industry as
Prime 60
– 80
Subcontractor to
Prime 80
– 100
This experience can vary significantly from company to company. Factors
can positively impact results and maximize cash. Many are discussed above.
Others also include:
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Alternative pricing methods (i.e. for services
performed ___% complete)
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Progress
reporting
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Improving comfort level of Project Managers
discussing dollars
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Rewarding and holding Project Managers
accountable for collections
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Bonuses
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Performance review documentation
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Upper management’s proactive attitude and
communication of need/reasons for turning Accounts Receivable into cash.
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Other
As e-commerce becomes more widely used, electronic billing and payment
should be implemented. Customers are requesting this more frequently and more
companies are changing to accommodate these requests. The overall speed and
impact of this change is unknown. However, the principles discussed above should
not change, even though the way that they are performed and the timing of events
will probably change.
Summary
Days revenue in accounts receivable is largely controllable by every
company. It is a choice that management makes at the very start of the business
process. If you want to improve your cash cycle, you can. Companies vary from 40
days to 100+ days in accounts receivable turnover. It is your choice. Through
implementing these or similar procedures, your cash cycle can improve.
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