31 Jul 2012
For many professional services organisations, an emphasis on maintaining client relations and securing new deals has led to payment terms, and the impact they have on cash-flow, becoming a secondary business priority. In a turbulent economy, businesses have put so much effort into increasing sales and revenues, many firms have had to accept terms that were unacceptable a few years ago as a condition of winning. These often onerous conditions have increased the pressure on professional services firms as customers use them as ‘banks’ during these tough economic times. All of this pressure has dramatically increased the need for delivering projects on schedule and performing timely and accurate billing for all projects so cash-flow can be maximised in areas firms can control.
By conceding on payment terms, or sending inaccurate or late invoices, organisations have, in effect, provided interest-free loans to clients, involuntarily acting like a bank by ‘loaning’ their services. These ‘loans’ put a strain on cash-flow, cost the business money, and could lead to a peculiar situation where there are plenty of orders on the books but no actual money in the treasury.
The liquidity problem among businesses is worsened by the fact that many companies still find it difficult to borrow money and take out new bank credits. Despite claims to the opposite, many businesses report that the loan market is becoming tighter, even for prosperous European businesses, due to reoccurring fears about the eurozone’s debt.
According to Reuters, European banks also say they are willing to lend but are under regulatory pressure to increase capital buffers, meaning they still have to tread carefully when deciding on loans.
When professional services organisations are able to manage, measure and improve cash flow, they benefit from increased credit control and improved forecasting. This happens only if they stop behaving as a personal lending service to clients if they can and/or they set improved liquidity as a clear company goal.
So, what steps can firms take to avoid being a bank for their clients and even increase liquidity throughout the organisation? Understanding the negative cash-flow impacts of effectively loaning money to customers should be at the forefront of the minds of those closing the deals. By making the organisation aware of these negative impacts, conceding on payment terms should be avoided in the first place or, at minimum, used as a key negotiating tool in the sales process. If a customer effectively wants a loan, raising the deal price accordingly or receiving other concessions – like getting the customer to assist the firm in marketing their services (e.g. customer acting as a reference, agreeing to do referrals) – can turn a negative situation into a positive one. By discussing the issue proactively with the customer and not simply conceding to their payment term demands, a win/win compromise is much more likely to happen.
If making payment terms concessions is a hard reality, there are ways a professional services firm can increase liquidity through technology. Deltek, a leading global provider of enterprise software and information solutions for professional services firms, has heard repeatedly from its clients that, by using the right technology to complement the right business processes, companies will be able to streamline business reporting and processes.
Two common areas of opportunity are better project management and improved timekeeping. Controlling cash-flow in an organisation is a tough task, so strong project governance is needed. In large projects with greater complexity and a large number of project team members, it is important to have project management and resource management tools that keep projects on schedule and on budget so the company can get paid on time for the work completed. In addition, having foolproof timekeeping systems in place that work in tandem with project and resource planning systems, ensures all time is captured and billed quickly and accurately. This translates into cash being collected as quickly as possible.
Maintaining and improving cash-flow will and should remain a business priority for European companies in 2012. Hiding or ignoring cash-flow problems and acting like a bank to clients is a considerable risk even for growing and profitable companies. Try to avoid acting like a bank if possible – and if business needs dictate that you need to be lenient on payment terms, it is best to have a rigorous technology infrastructure and sound business processes in place to maximise cash flow in ways that you can control.
For more information visit: www.deltek.co.uk