The Exact Process One Practice Followed To Reduce Their Debtors By Almost £525,000 In Just 4 Months
(That Works No Matter What The Size Of Your Practice)
(Please note that names have been changed to protect client confidentiality)
The first time I met Josh at his firm, he was short of breath. His stress levels were very high.
As a five-partner firm, they had been banking with Natwest Bank forever. But their overdraft had been sitting at just short of £1m for a long time — and they were running their business on that overdraft limit, never really reducing it much.
And the bank had become concerned about this. As a result, they were moved over to a division within the bank that looks after problematic accounts.
This was a big blow to Josh’s confidence. At the end of the day, as managing partner, this sat squarely on his shoulders.
And there have been progressively more and more months where they have had to battle to have enough cash for payroll.
They had about £1m in outstanding debtors and about another £800k in Work-In-Progress.
Josh was embarrassed about the situation they found themselves in — and if he knew how to get them out of it, he would’ve done so already.
Reality is that every one of the partners were overworked. Josh’s inbox consisted of hundreds of emails and he was falling behind. And on top of that, there were a few things in his personal life that made his personal stress levels extremely high.
Here are some of the steps we took over the next four months in Josh’s firm to completely turn things around.
Please do remember that the following may or may not be relevant to your own practice. Always keep in mind that you are looking for principles and ideas which you could in one way or another translate into your own practice.
The Exact Process One Practice Followed To Reduce Their Debtors By Almost £525,000 In Just 4 Months (That Works No Matter What The Size Of Your Practice)
Current Outstanding Debtors
In order to reduce our Current Outstanding Debtors and get this under control, there are a few things we need to do.
Our Red Ant Sergeant Major
As with all roles in any organisation, we need the right personality to be doing the job of credit control. We need someone who is persistent, tenacious, friendly but assertive and confident.
Do not make the mistake of picking a receptionist who is running low on work to do this job if her personality is not suited to this work.
The person we pick needs to have sufficient blocked and focused time available for this role. If your debtors’ book is sufficiently big enough that this is a full-time role, that is great. If this is a part-time role, then that person only needs to be focused on doing this job for certain blocks of certain days.
Weekly Meeting Rhythm
When something in your world is not working, you want to increase the frequency of looking at that item. When my kid is healthy, I don’t need them to take medication — ever. When my kid is sick, I want them to take their medicine three times a day every day until they are better.
The rhythm of catch-up is very important.
When our debtors’ book has spiralled out of control and we have found someone to start chasing those debtors, then we want to put in place at the very least a weekly meeting of catching up to find out what the latest progress is.
You want your Debtors Control person, your ‘Red Ant’, to come into the meeting with a printout of the Aged Debtors Summary. Quickly review it with them, starting with the oldest column first.
Work your way down that column for every material debtor (you decide which number you will choose as your materiality figure, otherwise you will need to stop at every debtor, and depending on the size of your list, that may simply take too long).
For every material debtor the question is always the same. ‘Give me in a few words only the Who, the What and the When (yes, it is our friend, the WWW triangle again). Who did you speak to? What did they say?’ Keep this bit short. ‘When are they paying us or when is the next step?’
Once you’ve completed your oldest column, then you start at the top of your second oldest column and work your way down that one until you’ve made your way to the current debtors.
This process can be completed in less than twenty minutes. Quick, snappy answers.
Typically, what you will find the very first time you go through this list in this format is that your Debtors Control person may have very few answers, or that they want to give you long answers.
If you find this to be the case, simply say, ‘Thanks a lot — good work so far. Carry on with this work and when we meet again in a week’s time, I’ll ask you the same questions again.’
Remember — we are in a process of puppy training once again. This is not about getting frustrated or upset. It is simply a way of showing what we expect to happen.
And what you will find the second time you do this meeting one week later is that the Debtors Control person will have worked their way through the entire list, and this time will be able to give you short and sweet Who-What-When answers for every outstanding debtor.
What you will always find is that once this process starts, money will start hitting your bank account by the thousands. Just reminding clients about their outstanding amounts will get a lot of them to take action and actually settle their outstanding invoices.
Now the clear-up begins.
All invoices that are on the ledger which need to be written off or corrected — set that as a task for the coming week.
What you will also find through this process is that there are some debtors on your books who have been there for a long time and are simply taking the mickey.
Perhaps they are not clients anymore. Perhaps they always have fantastic, but nevertheless weak, excuses. These are the ones you need to decide to take to the next level.
At the end of the day you and your team have put in a lot of energy and focus to do the work they required. In a fair exchange, they owe you money.
But some are non-responsive.
Various options exist — legal firm, debt recovery agencies, small-claims court.
Whatever option you choose, the point is that you have to draw a line in the sand and take action.
This may require some courage, but as with all leadership, it is about doing the right thing, not the comfortable thing.
You have kept your side of the bargain, which is to do the work. Your client needs to keep their side of the bargain, which is to pay you.
You are not the bank for your clients.
Within four to eight weeks of implementing the above, your outstanding debtors will be in control and you will have cash in the bank.
Putting the systems in place
Invoice Due Systems
We want for our ‘Red Ant’ to put an Invoice Due System in place. This can take various shapes.
- This may mean that one week before an invoice becomes due, the client receives an email reminding them that the invoice will become due in one week.
- On the day when the invoice becomes due, they receive another email reminding them that the invoice is now due for payment.
- One week after the invoice is due for payment, they get another email letting them know that the invoice is now overdue.
- And one week later they get a phone call from our ‘Red Ant’ person, who then stays on their case until the invoice has been paid for.
Ideally we have a way to automate these email steps (Chaser.io is one option), but if not, then it can still be done manually.
You want to start shifting your clients over to a direct debit system, as it puts you in control of when money is taken.
(I would highly recommend a system such as GoCardless. It is very easy to set up. It costs, at the time of writing, 1% of the transaction fee with the maximum amount being £2 per transaction)
More importantly, unlike standing orders, when there are extra amounts, or larger amounts, you are in control of getting the correct amount paid from your client.
A fixed standing order figure will require a separate payment from the client once in a while.
And of course, this never means that you simply have an open cheque book with your clients.
Any amounts taken need to have been pre-agreed and your clients need to have signed their agreements to each and every amount that will be leaving their bank account.
Never assume that you mentioned it in a conversation and at the time they nodded their head and said ‘Yes.’ I promise you that will only come back and bite you where you don’t want to be bitten. Ensure that you always have your signed upfront agreements.
This will require a decision on your side to make this happen, and then a concerted effort to have this conversation with all your clients.
You must let them know that not only is it in their benefit to pay their account on a monthly basis going forwards, but as a proactive practice, you are keeping abreast of times, and in the same way as they pay their electricity and phone bills via direct debit on a monthly basis, going forwards, that is how you will be doing it as well.
Will all clients move to this system?
Is it a good idea to try and get as many of your clients to make this shift?
It will put money into your bank account — money with which you can either build your practice, or just go and have a great holiday.
Are all your clients going to pay their outstanding debts as you’d like it to happen? Probably not. But the better question is, Are the majority of your clients going to pay their outstanding debts?
Yes. If you follow the system as outlined above, then they will.
And you will have much more cash in the bank.
Following this process, Josh and his team reduced their outstanding debtors by almost £525,000 in only four months.
(The article above is an extract from my Amazon best-selling book, ‘The Highly Profitable Accountant’. It usually sells on Amazon for £14.99 however you can download a digital version for free here)