Why do accounting firms allow their clients to treat them like interest-free lenders? Unlike wealth managers, attorneys and other professional service providers, accountants routinely perform months of labor-intensive work before spending even more valuable time chasing down payments. Isn't it time to rethink this outdated model?
I come from the wealth management industry. There's no accounts receivable in that profession because we bill clients a fixed percentage of assets under management. Most attorneys don't have AR either. They require clients to pre-pay them a retainer and when that retainer runs out, clients must re-up if they want the firm to keep representing them.
So why do accountants essentially tell clients: "I'm going to do a whole lot of difficult work for you, and then start hounding you for weeks and months to get paid"? Why is that even a negotiation? It doesn't sound very professional, does it?
When it comes to slow receivables, many CPAs tell me clients aren't paying promptly because they want time to review the bill. That's a copout. Clients are super busy. They're not paying close attention to their voicemails and emails (including your invoice reminders). After two or three months of "reminders," they often can't remember what you're billing them for. Then you have to go through your bill with them line by line and validate your own fees (and your value). That can be an awkward conversation because after so much time, they've often forgotten about all the great work your team did for them. You may have forgotten, too.
We're not bail bondsmen or the cable company. We're licensed CPAs. We shouldn't be using our valuable time and people resources to hound clients for money. It's degrading for the firm and insulting to clients as well. Fortunately, there's a better way.
Pre-authorized billing
In your proposals for new clients, make sure they provide you with their bank account or credit card information so you can keep it on file for billing. If you have a set monthly fee for ongoing work, that's great. You put that amount in your proposal and you automatically bill the client the agreed-upon rate on a consistent monthly or quarterly basis. If you're doing a client's tax return once per year, you clearly state expectations in your proposal: "Once the agreed upon work has been completed, we'll email you a detailed invoice of all the work that's been done. If you have any issues, let us know ASAP. Otherwise, your account will be billed for the invoiced amount in 14 days."
Again, you're giving clients two full weeks to review the bill. If they don't reach out to you with questions or issues, you bill them in full. Occasionally a client will question some charges on their invoice. That's fine. You're a professional. Take the time to go over the fees with them and make adjustments as needed. Most of the time clients don't question their invoices. They trust you and value your expertise. They just want you to make their life easier.
But even in this frictionless Amazon and Netflix age, many accountants don't want to do pre-authorized billing because they fear some clients may be upset about it. Sure, there will always be a small percentage of clients (say 5%) who hate change and every new wrinkle you roll out. Another 5% will love everything you do no matter what. But the 90% in the middle won't care as long as you frame it properly. It's just a big bell curve.
Importance of framing
After you make the move to pre-authorized billing, you must explain clearly to clients why you are changing your billing method. For instance, you could say, "We're moving to a pre-authorized billing agreement. This does not mean we are going to bill you without telling you. It simply means that as the work is completed, we're going to send you the invoice, letting you know what the bill is going to be. If you have any issues, you'll have ample time to reach out to us to discuss. If not, then for your convenience, we will go ahead and process this payment transaction for you."
Feel free to tweak the explanation above as you see fit. Just make sure you send it before changing your billing. Another benefit of pre-authorization is that it's a good weeding-out tool. If you have clients who consistently question your charges or don't want to pay their bills on time, that's a good sign they're not great clients and you need to let them go.
Death to AR is really about making your firm's life better and your clients' lives better. If clients understand the value you're providing them, why make it difficult for them to pay you? And if they're going to disagree with the charges, they're going to reach out to you anyway. Either way, everybody's in a better situation with pre-authorized billing and no more AR.
As our client's most trusted advisor, we shouldn't have to call clients and remind them how much they owe us. Our job is to remove friction from all aspects of their financial lives, including paying their accounting and tax prep fees. It means you, your team and your clients spend less time chasing each other down, and more time talking about the things that deliver value.
As with any new strategy or process you implement in your firm, there are going to be some hiccups. But these are hiccups you address from a position of trust and mutual respect. You work through those issues together and put everyone in a better position. I've learned throughout my career that relationships are stronger after you've gone through (and resolved) conflict together than if you never had conflict at all. You and your team do great work. Don't make it hard for clients to pay you. What is your firm doing to reduce receivables? I'd
