ARE Daily | PcM #16 — Managing Accounts Receivable & Controlling Overhead

Quick Recall (from #15 — Financial Ratios, Setting Fees & the Net Multiplier)

An employee earns $50/hour. The firm uses a net multiplier of 2.8. What is the billing rate to the client?

$140/hour. The net multiplier is applied directly to the employee's hourly rate: $50 × 2.8 = $140. This single factor accounts for fringe benefits, indirect labor, overhead, and profit margin — all collapsed into the multiplier.

Today's Content

Two critical financial management topics that are heavily tested because they directly affect a firm's survival: collecting what you've earned, and not spending more than you need to operate.

Managing Accounts Receivable

Getting paid promptly is not optional — delayed payment is effectively lending money to clients interest-free. An invoice older than 90 days means the firm is financing the client's project. The four fundamentals of collections:

1. Put collection terms in the contract. Before work begins, establish in writing: the fee basis, when invoices will be sent, when payment is due, interest charges for late payment (typically after 45 days), and what happens if the client doesn't pay — including the firm's right to stop work and halt presentations. An attorney should review this language.

2. Invoice promptly. Send invoices as soon as possible after each payroll period. A monthly billing cycle at most — some firms bill twice monthly. Avoid agreeing to lump-sum payments at phase completion; on large projects this can delay cash inflow for months. The faster the invoice, the more easily the client associates it with work performed.

3. Make invoices complete. Every invoice must include the client name and address, project name and number, contract reference, detailed breakdown of work performed and associated fees, reimbursable expenses with backup documentation, and any past-due balance. An invoice that shows only a dollar amount invites dispute and delay.

4. Track accounts systematically. Follow up two weeks after sending if no payment has been received — not as a threat, but to confirm receipt and answer questions. Send past-due notices at 30 days. Make personal calls after that. Keep written records of all collection activity. The aged accounts receivable report is the key tool here — it categorizes all outstanding invoices by age (30, 60, 90, 120+ days) so the firm can prioritize collection efforts on the oldest accounts.

A retainer of 10–20% before work begins is a reasonable and standard practice. If a client objects to a reasonable retainer, that's worth investigating before proceeding.

Controlling Overhead

Overhead doesn't generate revenue, so minimizing it directly improves profitability. The largest overhead component is indirect labor — time spent on administration, marketing, and non-billable activities. Accurate time reporting is the first line of defense: ensure all legitimate project time actually gets charged to projects.

Other overhead reduction strategies: charge all legitimate project-related direct expenses to clients (printing, delivery, travel, model supplies — these add up), shop insurance policies and communication services regularly, evaluate office space utilization, and consider teaming with other firms to share continuing education costs.

Today's Questions

1. What should a contract include regarding fee collection, beyond simply stating the fee amount?
2. An invoice is sent on January 1. The firm hears nothing. Walk through the appropriate collection sequence and timing.
3. What is an aged accounts receivable report, and how does it help the firm prioritize collections?
4. A firm discovers its principals are logging 30% of their time as non-billable "general coordination." What is the financial impact, and what should change?

Next up: Legal Issues — Agency & Duties

Answers from #15 — Financial Ratios, Setting Fees & the Net Multiplier

1. Current ratio of 0.9 — what does it indicate? → The firm cannot comfortably meet its short-term obligations — current liabilities exceed current assets. The generally accepted minimum is 1.0; a healthy firm is at 1.5 or above. A ratio below 1.0 is a warning sign.
2. Employee at $50/hour, multiplier of 2.8 — billing rate? → $140/hour. ($50 × 2.8)
3. Net multiplier vs. break-even rate — what does each tell the firm? → The net multiplier (typically 2.7–3.0) is the target billing rate that covers all costs and generates profit. The break-even rate (typically 2.30–2.50) is the minimum rate that covers costs with no profit. The gap between them represents the profit margin.
4. Why cross-check proposed fees against past project benchmarks? → As a sanity check on the estimate — comparing projected fees for a new project against what similar past projects actually cost prevents systematic underpricing. It catches errors in hour estimation before the proposal goes out.

Additional Quick Recalls

From #04 — Office Organization What is a quality control circle, and what problem is it designed to solve?

A quality control circle is a small, ongoing group of employees who meet regularly — among themselves and with management — to identify and resolve issues in their area of work. It's based on the principle that employees closest to the work know its problems best. It's not a response to a specific crisis but a standing mechanism for continuous improvement.

From #11 — Business Development Why are past clients one of the most valuable marketing resources a firm has?

A satisfied past client is both a source of repeat work and a generator of word-of-mouth referrals — two of the highest-conversion lead sources in professional services. Both are essentially free and carry the credibility of a real relationship, which no advertising can replicate.

From #14 — Financial Terminology What is the difference between accounts receivable and accounts payable?

Accounts receivable: money owed to the firm by clients for invoiced services not yet paid. Accounts payable: money the firm owes to suppliers and consultants for services or goods received but not yet paid for. Receivables are assets; payables are liabilities.