Tips for improving cash flow: Diagnosing accounts receivable

Collecting outstanding receivables is a pressing issue for many accounting and tax professionals, and firms. By identifying and understanding the root causes for accounts receivable (AR), you can take steps to resolve the problem within your accounting practice. Read on to learn practical tips and techniques for improving cash flow, reducing the risk of delinquent accounts, and ultimately increasing your profitability.

Identifying the root causes of outstanding receivables

To resolve your accounts receivable (AR), you must first identify what’s causing these. Some common causes for accounting and tax professionals include:

• Ineffective billing practices.

• Poor communication with clients.

• Unclear payment terms.

Addressing these issues takes a comprehensive approach that involves carefully re-examining each of these factors. First, take a close look at your current billing practices and identify areas for improvement. Are you guilty of any of the following, for example?

• Inconsistent billing schedules and frequency.

• Not providing detailed invoices or charging for all the services you provide.

• Failing to follow-up on unpaid invoices or not having a robust collections process in place.

• Not using technology to automate billing processes and manage invoices.

If you’ve answered ‘yes’, perhaps it’s time to consider a new revenue model, streamlining your invoicing process, or both.

The two Cs: Communication and cadence

For Jennie Moore, Ignition’s Partnerships Manager (AMER), when diagnosing AR in your firm, the two Cs are key: communication and cadence. “You need to say to yourself, ‘Let's figure out how we got into this mess in the first place. How did we build accounts receivable?’” she says. “How you built accounts receivable is probably by not telling the client that there was additional work or additional scope; or not asking the client for a retainer upfront.”

The root cause of the problem, Jennie Moore says, is that accounting and tax professionals are not talking to their clients. “We're not good at having that conversation with our clients,” she says. “We’re building accounts receivable by simply not talking.”

'We're not good at having that conversation with our clients,” she says. “We’re building accounts receivable by simply not talking.'

- Jennie Moore, Partnerships Manager (AMER) at Ignition

The root cause of the problem, Jennie Moore says, is that accounting and tax professionals are not talking to their clients. “We're not good at having that conversation with our clients,” she says. “We’re building accounts receivable by simply not talking.”

In fact, according to Ignition’s 2022 State of client engagement in the US, 89% of accountants and bookkeepers said they have delayed or avoided having an awkward conversation with a client. For many accountants and bookkeepers, the fear of losing a client is often stronger than the desire to confront them or negotiate with them.

In reality, most times, clients are more than willing to understand what's going on, says Jennie Moore. The solution, she asserts, is better communication and having that conversation upfront.

“Think about your mechanic with your vehicle on the hoist. He says, ‘We notice your AC lines are leaking, and you need brakes’. Well, it’s best to know that while it's on the hoist rather than finding out when you get the bill later! Knowing the commitment upfront not only helps your firm minimize accounts receivable, but also focuses more on the client relationship,” she says.

But more than just communication is the cadence (the other C) of that communication. ‘Cadence’ refers to the frequency and rhythm of this communication with clients. It’s about setting a regular and consistent pattern for when and how you communicate with them, such as how often you send out updates or have a check-in. A dependable cadence can help build trust and strengthen client relationships. Because, as we’ve seen, an inconsistent or haphazard approach may lead to confusion, missed opportunities (and revenue!), and decreased client satisfaction.

Clear and regular communication with your clients allows you to outline your process, set clear expectations about payment terms, offer updates on outstanding balances, and more.

“Ultimately, my tip is so simple,” Jennie Moore says. “Talk to your clients.”

'Ultimately, my tip is so simple. Talk to your clients.'

- Jennie Moore, Partnerships Manager (AMER) at Ignition

More techniques for improving cash flow

Now that you’ve got communication on the right track, there are some other steps you can take to resolve your AR and improve your cash flow. These include:

• Taking client payment details upfront as part of your proposal: With Ignition, you can request payment details and upfront deposits right from your proposal, reducing the risk of late or non-payments. You can also bill and collect payment automatically, meaning less effort for you and your clients. Find out more in How to move to upfront payments.

• Invoicing promptly: The sooner you invoice your clients, the sooner you get paid! In Ignition, you can invoice clients automatically by connecting Ignition to QuickBooks Online or Xero and even send automated reminders when a bill approaches its due date. By setting up the system to automatically withdraw funds by a specific date, you can eliminate the need to ‘chase’ payments.

• Establishing clear payment terms: In your engagement letter, include a section detailing your payment terms. When is payment due? How will the client be billed? Ensure there’s no ambiguity; and if possible, enable the client to easily make payments once the engagement letter has been signed. Ignition makes this step easy through the app's client billing features.

• Regularly engage and re-engage your clients: Engagement letters are the best way to both safeguard your position and cash flow without damaging client relationships, especially when combined with regular invoicing and taking control of payments.

With these straightforward steps, you’ll be maximizing your revenue streams in no time.

Over to you

Want to learn more about how Ignition can help you improve your cash flow and help you achieve a zero accounts receivable practice? Watch our demo today.