how to get paid what you’re worth. on time. every time.
by august j. aquila
price it right
is the phrase “effective billing philosophy” an oxymoron? i’m beginning to believe that it is.
more: 6 steps to making your new pricing happen | 5 ways to get clients to accept a new pricing philosophy | 11 alternative pricing methods | applying cobb’s value curve to your firm | the four types of competition | marketing and the 5 p’s
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analysis of the results of current billing and collection procedures and policies reveals that, for the most part, they aren’t working very well. the fact is, they have not worked well for decades.
while it is true that most firms have some sort of billing procedure and some even have a billing philosophy that is taught to each new biller, the fact is they are seldom followed. hence, very few firms have an effective billing and collection philosophy.
the other factor that needs to be recognized is that one billing philosophy will not work for all firms. different practices require different billing philosophies. if your practice is heavy into governmental work, your billing and collection procedures will be completely different than if you have an estate planning practice. nevertheless, the concepts discussed here will still apply. you will just need to adapt them to your particular practice.
“pricing is the exchange rate you put on all the tangible and intangible aspects of your business. value for cash.” – patrick campbell
developing an effective billing philosophy
based on personal experience and the discussion of this topic with several managing partners and consultants to the profession, i would like to propose what i believe to be the basis of an effective billing philosophy.
1. know what you are providing. perhaps the first and most important aspect of an effective billing philosophy is for the billers – who should be the service providers – to make the distinction whether they are providing the client a compliance-oriented service, which the client may perceive to have very little value, or they are providing the client with a true value-added service that the client wants and believes is an improvement of his or her life or business.
2. the service provider should prepare the bill. in smaller firms this is not necessarily an issue. however, in many midsized and larger firms it is frequently the managers and supervisors who have daily contact with the clients, while the partners move away from knowing what to really bill the clients. the biller should be the service provider who does the majority of the work. the partner will still approve the bill and send it, but it is proverbial that the person who does the work will usually bill out more.
3. bill constantly. bills and billing should be done on a daily or weekly basis. as soon as an engagement is completed or, even better, while the engagement is still in process, interim bills should be prepared and sent. the ideal situation would be to deliver the final bill on the day that the engagement is completed. currently, many firms bill during the first 10 days of the month. the client receives the invoice and schedules it to be paid the following month or nearly 60 days later. if the client had received the invoice at the end of the month when the engagement was completed, the invoice would have been paid 30 days sooner. if the engagement is completed, don’t wait until the beginning of the next month to send the bill. it doesn’t make much sense.
4. keep daily time sheets. it’s becoming easier and easier to enter time sheets in real time. at a minimum, daily time sheets should be mandatory at all firms. this is a cultural change that needs to be made. it should be as if you are punching in a time clock. in order to get paid for the week’s work, you need to clock your hours or your charges to the clients.
5. make sure there are no surprises. all clients should know what their base fee is going to be, and they should know it at the beginning of the engagement, not at the end. the engagement letter should spell out the payment policy. most clients will be more agreeable to your fee before the work is started and is still needed by them, rather than when the project is completed and they are finally informed of the price. can you imagine buying something and not knowing what it would cost you and when you would have to pay for it? think of that for a moment. it’s no wonder that our clients are often surprised and complain about the bills they receive, and pay slowly. wouldn’t you? it may seem radical, but more and more service providers are requiring payment up front or immediately after the service has been performed.
6. accept only the best clients. make sure that the clients you accept pass your new client acceptance test.
it doesn’t do much good to have a lot of clients who don’t pay.
make sure you follow your client acceptance policy and educate your clients as to your billing philosophy. a key part of your billing philosophy should be the initial needs analysis and developing an engagement budget to complete the work.
7. follow fixed procedures. billing is no different than doing an audit. you have certain steps to follow and you don’t deviate because you know what your exposure will be. when you deviate from your billing procedures, you won’t be sued, but you will be exposed to losing thousands of dollars or more.
8. effectively communicate with the client from the beginning. just like item 5 above, constant and effective communication with your clients is critical. when you think about it, most if not all write-downs and write-offs occur at the end of the engagement or several months after the final bill has been sent. another important element in communicating fees is the way you do it. it has often been said at accounting firm conferences that if a cpa lacks confidence in his or her fees, a client will pick this up and frequently request a reduction in fees. however, if the accountant is self-assured and confident that his fees are fair and he is worth every penny, the client will be more comfortable with the fee quoted.
9. learn how to use change orders. whenever there is a change in the scope of the engagement, you should issue a change order to the client outlining the additional work that will need to be performed and the added fee. again, the change order needs to be prepared at the earliest moment so that the client can decide before the work is started whether or not he or she feels it will be worth the added fee. most accountants do the work first and then decide if they can bill it or how much of the time can be billed and then start the negotiation process with the client.
10. the service provider should not be the one to collect. the accounting and legal professions are the only professions that i know of in which the service provider not only sells and delivers the service, but is also responsible for the collection of outstanding receivables. when was the last time you received a call from your doctor or dentist asking for a payment?
obviously, if the other steps in the billing procedure are done with perfection, this should not be an issue. but in reality, there will always be some cases where you or someone from your firm will have to ask for payment. an effective procedure to follow is this: after an invoice is over 30 days late, your office manager or accounts receivable person should make a soft call to the client’s bookkeeper informing them that the bill is outstanding and ask if there is any problem in making the payment. the caller should obtain a fixed date from the client as to the payment. if the total amount cannot be paid, then some type of payment schedule should be determined.
11. make sure your engagement letters are contracts. there should be no surprises to a client that they have entered into a binding contract with you. you should have your current engagement letters reviewed by a local attorney because the laws covering this area vary state by state.
12. have your engagement letters reviewed by your professional liability carrier. it is also a good idea to have your engagement letters reviewed by your professional liability insurance carrier. this will provide you with greater comfort in case you do need to sue a client for nonpayment. conversely, if you are sued because the scope of your work is in dispute, the signed engagement letter outlining the work you are to perform will go far in protecting you.
13. use an engagement control system. this is an effective technique to use for larger engagements. it is not recommended for small engagements. the cost of using such an engagement control system can be greater than the entire cost of the engagement. there are many time and billing systems out today that also have an engagement control module, which will take a budget for the engagement and track the time and expenses used to date. this type of system is worth its weight in gold because it will act as an early warning system for any potential problems with regard to spending too much time on an engagement.
14. decide at what point you will sue. in today’s litigious society, this is a matter that comes up frequently. most of the time if an accountant sues, it is because the client felt that the services were not properly performed or were priced too high. threat of a suit may indicate to the client that you are serious and are acting in a businesslike fashion. however, you need to take into consideration that the majority of suits against cpas are countersuits because the cpa has tried to collect outstanding fees. the down side is of course with your insurance carrier. you sue a client for $2,000 in uncollected fees and the client turns around and sues you for $15,000. if you develop a policy of suing clients remember these two things: first, many times you will be countersued. do you want to spend the extra dollars in legal expenses? second, your premium for professional liability insurance may be raised by your carrier if you initiate several suits. if you don’t notify your carrier of a counterclaim, you may lose your professional liability coverage completely. as much as 13 percent of all malpractice claims come from counterclaims against cpas.
some firms are getting around the legal issues by taking their clients to small claims court. do not threaten to take a client to court unless you really are going to do it. a workable policy might be: after two or three broken promises to pay, notify the client that you will be filing in small claims court within 72 hours unless payment is received.
15. bill for out-of-pocket expenses. many firms do not charge back to their clients the expenses incurred in servicing of their account. the term out-of-pocket expenses has come to cover a large array of items. it is not unusual for firms to bill clients for:
- technology charges
- local and long-distance telephone charges
- administrative support time
- computer processing time
- messenger services
- photocopying charges
- per-page charges for typed documents
- new client and engagement setup charges
rather than having a separate charge for each of the above items, many firms just add a fixed amount per billable hour for overhead expenses. clients do not like to be nickel and dimed for every little expense. however, the total amount of these charges can be significant. even if a firm decides not to bill them, it is important to capture them in order to determine your true cost of servicing the client. most of these charges can now be easily captured through software that interfaces with the firm’s time and billing system. the charges can be downloaded daily to the client’s billing code.
cost recovery applications have been commonplace in large law firms for some time. these are not as common in small and midsized accounting firms. today, however, technology costs should not be a factor in stopping you from looking into capturing these expenses.
tracking software devices installed at most copier-scanners force the entry of a client matter number (or admin number). they can be installed in individual desktops as well, so that anything sent from a desktop to any networked device can be captured. or you outsource the work, thus making a soft cost a hard cost. third-party invoices are then passed through to clients.
whatever your firm’s billing philosophy is, it is important that it be in writing so that partners and staff have a clear understanding of what it is and that they follow it. your billing philosophy forms the basis of your billing and collection process. it has been said that if you put 10 partners in a room together that you would get 10 different billing philosophies. you can see then the importance of getting the partners/shareholders in the firm to agree upon basic principles.
16. capture finance charges. similar to other charges, if you do not capture finance charges, you will never be able to bill them. too many firms are in the business of lending money to their clients, especially their long-term clients, when they don’t charge interest on their invoices. new clients, as well as older ones, should be made aware that interest will be charged if invoices are not paid within 30 days. many firms will charge 1 percent on outstanding balances over 30 days. the going rate charged by most firms is in the 1 to 1.5 percent range.
17. take credit cards. there is an easier way to extend credit to your clients without the firm having to act as a lending institution. during the past several years, the use of credit cards to pay for tax preparation work has become common. you should ask all clients to have a credit card on file with your firm.
there are several benefits to accepting credit cards. the main one is that you no longer have to worry about a receivable. depending on the credit used and the volume you charge, there is a charge to the firm for the use of the card.
18. put your philosophy in writing for your staff. whatever your firm’s billing and collection philosophy is, it needs to be put into writing so that partners and staff have a clear understanding of it and follow it.
your billing and collection philosophy forms the basis of your billing and collection process. it is important to get the partners to agree on your firm’s basic principles.