Managing Your Own Cash Flows

MANAGING YOUR CASHFLOWS

A. A chartered accountant went to his bank, to ask for an overdraft facility. The bank manager was pleasantly surprised. While he was delighted to get a borrower of sound credibility, he was yet curious to known as to why did a CA with a reportedly established practice need an overdraft. He perceived CAs to be wealthy professionals with a perenially comfortable liquidity. Perhaps the manager momentarily forgot that even the best of AAA rated companies do borrow, to meet their funding needs. Just because CAs are intricately involved in financial consulting and are prudent business advisors, that does not mean that they do not face pangs of liquidity and mismatches in cash flows. Moreover just because CAs are generally in demand, that does not mean that they are well off too. It takes years of unremitting perseverance and a large dose of good luck, for a chartered accountant to be successful and to be affluent and rich too. And the rich also face liquidity shortages at times. It takes precision planning and a constant focus and follow up on billings and recoveries by a CA, to be able to weather any cashflow shortages, so as to avoid any borrowings, with all the uncertainties attached to professional practice, particularly in the case of first generation entrepreneurs, it takes years of disciplined financial prudence to build up an infrastructure and the minimum level of an assets base, so as to support a growing practice, Funds are needed to acquire operating practice infrastructure, such as a furnished office, office equipment, a library etc. In fact, fortunate are the ones, who are able to fund the build up of their office infrastructure through revenue earnings and annual accruals, instead of resorting to capital loans and borrowings.

B. Like in the case of any activity, the cashflows of a chartered accountant in practice, have certain peculiarities. These are as under:-

1. The traditional areas of practice of a CA, ie. tax, accounting and audit, popularly known as the bread and butter segment have high operating costs, low value addition, low margins of profit, but yet give predictable, stable and dependable income flows to a CA.

2. The non traditional areas of work of a CA, such as project funding, management consulting, joint ventures etc., though are much more profitable segments of work, they however have unstable and uncertain cashflow streams, which cannot be depended upon.

3. The chances of bad debts are poor in the case of traditional areas of practice and are much higher in the case of non traditional areas. This is largely because of the statutory privileges that they enjoy there and the umbrella of protection that the former have under the professional code of conduct.

4. Clients tend to delay payments to CAs, because they generally seek to do a direct cost benefit analysis in respect of payments to CAs. Moreover, they often perceive, such segments of services such as audit and tax, more as cost centers, being ‘statutory evils’ forced upon them by law.

5. An average CA is slow in billings and lethargic in follow upon recoveries, which strains his cashflows.

6. CAs thus have a high level of receivables, at times running into outstandings for many years from clients.

7. The features of daily revenues/cashflows, are as follows:-

·  High and predictable levels of fixed costs.

·  Budgeting is possible due to predictable costs.

·  Low variable costs of operations.

·  Capital budgeting is often not possible, due to constant uncertainties in the rate of growth of practice billings and the likelihood of a sudden dip in billings.

·  Predictable income streams from traditional areas of work.

·  Cashflows from non traditional areas of work are uncertain and often are in tandem with business cycles. They increase in boom times and decrease in bust times.

·  While income may be certain, recoveries of billings for jobs done are often uncertain, which results in cashflow mismatches.

· Borrowings for funding fixed costs can be risky, due to the uncertainty attached to income growth as well as the liquidity mismatches from time to time.

·  Except for their faith in the quality of services rendered and their commitment for the wellbeing of clients, CAs have no other ‘security’ in respect of outstanding receivables, other than in those cases, where their NOC is needed for the appointment of another one instead of them.

·  Billing also tends to be seasonal, though costs are not.   

C. A typical working capital cycle in the case of a practicing CA is generally as under:-

The phases of activity in this cycle are:-

Phase A – Costs incurred and jobs completed.

Phase B – Performance delivered, thus billings done.

Phase C – Recoveries from clients.

Like in the case of any working capital cycle, shrinkage of any of the above phases, not only improves productivity and profitability, but also the liquidity position, so as to prevent any mismatches in operating cashflows. The observations here are:-

1.  Reduction of phase A, means savings in cost, better productivity and much more efficient and timely service to clients. Shrinking this phase, directly improves the profitability of a CA’s operations.

2.  Reduction of phase B means that billing is done immediately, a legal debt is created, so that recovery can now be expedited. Efficiency here means that after costs have been incurred on delivery of performance to clients, the recovery process is initiated so as to shorten the gap between the incurring of costs and recovery of income.

3.  Reduction of phase C means that recovery is fast and that not only is the working capital cycle completed, but so is the business process, from the point of earning an income, to its point of recovery. Lethary and delays in phase B and C strain cashflows and liquidity.

D. TIPS ON CASH FLOWS:

A survey found that while CAs are great at giving advice, yet due to their professional preoccupation, they do not keep their own house in order. A sense of neglect is often found in the administration of a CA practice, which adversely impacts their own cashflows and liquidity. The following are useful practices for improving cashflows of a CA practice:-

1. Prepare and dispatch bills to clients, as soon as a job has been completed. It has been noted that recovery of fees is expedited, when the CAs performance is fresh on mind and the client thus fees obligated to pay up too.

2. Keep reminding clients, that our efforts to service them involve high level of fixed costs, such as towards manpower, which have to be paid out on a month to month basis, irrespective of the recovery of billings by the CA. It helps to demand and expedite recovery, since a client is aware of the costs being incurred, for his matters.

3. As part of a regular relationship with a client, every CA renders various services, which though beneficial and critical to a client, result in no income to the CA. Keep a record of such unbilled services and non billable hours, and inform them to the client, to remind him of the benefits he has derived, with no bills thereagainst. It has been found that this compels a client to make payment immediately and without protest.

4. After bills have been sent to clients, push for their recovery, as a matter of right. If we are willing to render services with a sense of duty, then we are honourably and rightfully entitled to the timely recovery of the billings too.

5. Taking fees in advance, wherever possible really helps. A system of taking advance fees from clients, can be instituted in the following cases in particular, so as to mitigate the risks of recovery and to uplift liquidity:-

- From new clients, where the relationship is new and untested and the client is in urgent need of the services.

- In the case of non traditional areas of practice, where the jobs will take a longer period to complete.

- Where high costs are required to be incurred upfront to render service to the clients.

6. In the case of long duration jobs, the progress of work must be constantly informed to the client  and billings and recoveries must be done on an agreeable milestone basis.

7. Build up cost and income structures in such a manner, that the fixed costs are recovered from the expected income from traditional areas of practice, so that income from non traditional segments, comes as a complete bonus and significantly adds to the practice liquidity.

8. CA practices tend to have seasonal phases. By offering a diverse range of services, through constant innovation and build up of skills, these seasonal phases can be eliminated or reduced, so that there are no off seasons and no strains on liquidity too. It will also help a firm to employ much better staff, which is a key determinant of the quality of services rendered.

9. Monitor jobs and coordinate with clients, for their timely completion so as to save on costs and finally expedite recovery of billings.

10. Visit clients and interact regularly. It builds stronger bonds and assists in the growth of the overall consulting process, including the recovery of bills raised.

E. To take the case of the CA further, the bank manager was delighted to sanction him credit assistance. He realised the cashflow bottlenecks of a CA, particularly when he noted that his list of receivables included some very reputed parties, (who were the bank’s customers too), who simply delayed payments, partly because the CA probably never pushed for their recovery. There is a Jewish saying, which says that the wheel that creaks the most, gets the grease first and a Chinese saying too, which says that a delayed debt is a dead debt. CAs need  to get into the recovery mode after rendering services, rather than simply enjoy the intellectual satisfaction and professional pleasure of job delivery, to the detriment of their own cash flows.