Improving Cash Flow

The ancient Roman historian and politician Sallust said “Every man is the architect of his own fortune.” Many readers of this article have the architect part down; it is the fortune that is difficult to grasp. The lore of architecture is rife with stories of great architects and bad business sense. At the end of each day, however, architecture is a business. The expenses of salaries, rent and office supplies do not stop in favor of such an honorable profession. You must ensure that cash comes in the door on a regular and timely basis.

Since mid-2008 in the face of a shaky economy, many service businesses have seen their collection cycle (time from billing to collection) increase markedly. Unlike the telephone and utility companies or insurance, many service businesses are unable or unwilling to “turn off” their services in the event of non-payment. As a result, service bills tend to drift to the bottom of the pile. However, certain good and consistent business practices can prevent your bills from being left unattended.

A particular problem for architects arises out of the way services are delivered. Once the project is underway, a great idea happens and the client says “do it.” Of course, the great idea must be implemented immediately. The additional services are performed in the heat of the moment with no written authorization and, later, no recollection from the client about approving the extra work. The lesson here is get it in writing. As a business lawyer, I cannot count the number of disputes I have seen revolving around the lack of written change orders.

The invoices themselves must be issued in a timely manner, as close as is practicable to when the services were performed. A delayed invoice signals to the client that you don’t really care about the bill or are not anxious to receive payment. Moreover, the client quickly begins to lose sight of the great job you did. I once heard that our services were like that of a prostitute – the value to the client goes down tremendously once the job has been completed. This quote may pertain to lawyers only, but I suspect it applies to all service businesses.

Be informed. The principals of the firm should receive on a weekly basis an aged accounts receivable report showing all outstanding invoices and the length of time they have been outstanding. The first reason for the report is informational. It may give the professional an opportunity to ask the client if everything is alright in an informal setting. Second, the report may create peer pressure internally. If your rent check is due and all of the receivables are stuck in the basket of one individual, her partners will often find a way to encourage her to address the collection problems, an activity most of us will do anything to avoid.

Implement a receivables collection system and stick to it. One example would be to send to the client a statement that invoices remain outstanding 30 days after such invoices have been issued. Have your accounting department or bookkeeper follow up with a phone call at 45 days. Remember that bill collection need not be all or nothing; if the reason for non-payment is a cash flow problem on the part of the client, set up a payment plan. Send another statement followed up immediately with a phone call from the principal in charge of the matter at 60 days. Set some certain time, such as 90 days, where the invoice will sent to a collections agency or attorney for collection.

A strong billing and collection system will contribute immeasurably to the health and stability of your business. Cash will come in on a more regular andexpected basis. Client agitation will be decreased if the bills are issued and collection processes effected closer to the time services were performed. In order to have a successful business, you must make sure to build your bank account, too.

About The Author

Patti Harris spent 13 years as the Managing Partner of a New York City-based construction law firm; in addition to overseeing the business operations of the firm, she advised clients on office and business management issues.

Learn more about Patti on our About page.