One of the biggest benefits of a fixed fee billing model for my firm has been the ability to eliminate accounts receivable.
A Typical Invoicing Process for Hourly Billing
When you bill by the hour, the usual process is to perform the work and then send an invoice for it. Invoicing may start on the first of the month, by gathering timesheets and notes (or filling them out) for work performed the previous month. Then comes the laborious process of creating invoices. When you’re billing by the hour, clients want detailed invoices that accurately reflect both the time spent and the work done. Preparing and sending invoices consumes hours and hours of unbillable firm time every month.
And of course, firms are busy doing client work for the current month at the same time they are preparing invoices for the previous month. Sometimes the invoicing gets pushed off a few days, or a week, or a month– or more! When the client finally receives the invoice, it often takes another 30-days for them to pay – if they pay promptly. Of course, even if they pay promptly, they may not pay the entire invoice. One of the problems with a detailed invoice is that it gives clients data points to argue about. So you may get a check for 70% of the invoice with a message that they’re sure you didn’t spend X hours on such-and-such, so they’re only going to pay you for Y hours.
With a fixed monthly fee for standardized client accounting services, we have been able to eliminate the invoicing process. When a client signs up for our services, they agree to have their monthly fee withdrawn from their bank every month on the first day of the month in which we will perform our services for them. The withdrawals are setup to occur automatically. Now all of those hours we used to spend preparing the invoices are available for profitable client work!
We still do a small amount of hourly work for our concierge clients with unique and variable monthly needs, but even that is paid for in advance. Consulting clients who want to schedule a “coaching session” pay at the time they book a session.
Eliminating receivables has benefits beyond saving time. It has improved our cash flow tremendously. No more waiting 30, 60 or 90 days to get paid– or having to write off bad debt. We are paid on time, every month. And, since we are paid through automatic withdrawals, our clients don’t have the option of not paying or making partial payments. We can now forecast and make business plans based on a predictable cash flow.
If you’re wasting hours every month on invoicing and collections, think about working towards zero accounts receivable. If you charge fixed fees for your services, use a workflow management tool like Aero to standardize and control your processes and labor costs. Control scope creep by clearly defining the services you will provide for the fixed fee and by having a process for obtaining authorization to charge additional fees for out-of-scope new requests.
A version of this article originally appeared on Insightful Accountant.