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Rebecca Mihalic discusses how accountants can put an end to trade credit troubles once and for all.

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As you may well have seen, the Australian Financial Security Authority (AFSA) recently declared that accountants are one of the six most common businesses to be highly exposed to trade credit. This basically means that if businesses are facing insolvency, they likely owe their accountant money, and depending on how bad the situation is, their accountant will likely never end up being paid what they’re due.

This is unsurprising. The unfortunate suggestion that accountants are highly exposed to bad debts is nothing new within the industry. And this isn’t merely a situation felt here in Australia, while the news was broken by the AFSA, it’s an issue that affects accountants all over the world.

Fortunately, however, this is completely within our power to rectify, so there’s significant light at the end of the tunnel. I caught up with our other global Heads of Accounting, Jennie Moore (Founder of Moore Details Inc) in Canada, Carl Reader (Director of d&t Financial Advisors) in the UK, and Joshua Lance (Managing Director of Lance CPA Group) in the US, to discuss how accountants can finally put an end to trade credit troubles once and for all.

Why are accountants more at risk than others?

Bad debt is more than a little unfair. Accountants work tirelessly to help manage their clients’ finances, ensuring ongoing compliance, offering up forward-thinking advice, and generally helping to grow their clients’ businesses. Yet, when their clients face insolvency, accountants often end up paying the price (quite literally).

But why is this? Well, as with anything, there are a variety of potential factors. That being said, there two in particular that we ought to highlight:

  1. We’re the people that businesses turn to when they need financial assistance

  2. Our traditional invoicing systems are letting us down

When businesses are in financial distress, or heading down that road, they often turn to their accountants for help. Many times, these accountants work wonders: helping their clients not only make it through the short-term, but giving them the support they need to thrive in the long-term. Accountants are nothing short of financial heroes. It’s wonderful that people turn to us for help when they need it most, and that they trust our expertise will help set their business right again.

We handle all their outstanding paperwork on their behalf, we get in touch with the taxman to negotiate payment plans and apply for grants, and we work tirelessly to analyse our clients’ data—before relaying these insights in an easy-to-understand, actionable manner. And, if none of this seems to work, we’re often the ones to point our clients towards the administrators. The problem is, once they’re at that point, it’s incredibly unlikely that you’ll recover your hard-earned (and much-deserved) money. Not only is it time and energy down the drain, but worst of all, it would’ve all been for nothing.

There’s one major culprit to blame for this: hourly billing. Believe it or not, the way you bill clients, and the frequency with which you bill them, could have a profound impact on your exposure to trade credit. The very nature of time-based billing immediately puts accountants at risk. Unknown amounts are invoiced on an infrequent basis, and often in arrears. If you send out inconsistent, irregular invoices, with large intervals between one invoice and the next, then you leave yourself exposed to trade credit. You’re basically offering a service for free. Well, until the time when the client pays you. The problem is, they may never end up being able to pay you.

It’s time to ditch this outdated billing practice.

Click here to start your journey to a fixed fee pricing model.

How can we make sure we’re protected?

As great as it is that we’re there to support businesses, especially in the last 12 months or so, we must also remember to protect our own practices. You can be the most client-centric firm out there, but if you fail to protect yourself against the risks associated with bad debts, then you could be putting your own practice’s future in jeopardy. This is especially important right now given the widespread, worldwide economic turbulence arising from COVID-19.

But don’t worry - there’s good news. There are multiple ways in which we can protect ourselves and make sure that we get paid. We should all:

  1. Conduct thorough due diligence on a client before agreeing to take them on

  2. Have detailed engagements in place for all the work that we do

  3. Moved to fixed-fee payments and invoice regularly

  4. Take payment details upfront (wherever possible)

Conduct thorough due diligence on a client

Carrying out due diligence can be an arduous and time-consuming process - yet it’s an absolutely crucial step before you go ahead and agree to work with a client. Fortunately, cloud technology solutions like Xero have become increasingly popular (and powerful) over the past decade or so.

As such, it’s now easier than ever before to dive into a potential client’s finances and carry out in-depth due diligence. Even if a business hasn’t yet moved to the cloud, there’s still plenty of information that we can ask for to make sure we’re seeing a new client’s financial state of affairs.

Armed with everything we need to know about how a client’s business is performing, we can then make smarter choices about who we decide to work with and how we engage with them. Perhaps your research suggests that a client might be overly risky. In this instance, it doesn’t mean that you should automatically refuse to work with them—but it does mean that you should put mechanisms in place to protect your own practice. In fact, you should always do this regardless of the risk associated with the client. You never know what may happen in the future. As the old adage goes: ‘Hope for the best, plan for the worst’.

Have detailed engagements in place

The single best way to safeguard your own practice is to have a clear engagement detailing the services you’ll provide, how much you’ll be charging the client, and how often. This is the foundation of a move to fixed-fee invoicing. Not only does it provide clarity for all parties involved in the engagement, but it’s also much easier to recover your fees if they’ve been clearly detailed (and agreed upon) in advance.

According to Jennie, this is more important than ever before: “Current economic challenges are complex for both clients and accountants. It's during times like these when options and tiered pricing will help both parties navigate uncertainty and assist with business continuity.” You don’t want to lock clients into a price that they might not actually be able to afford. By offering a few options, and embracing the power of tiered pricing, you can make sure that you offer your clients the services they need for the price they can afford.

Moved to fixed-fee payments and invoice regularly

Signing the letter of engagement is just the first step. As you proceed with the work, you need to make sure that you regularly invoice clients to minimise any damage if their business is suddenly unable to pay up. The more often you invoice and take payments, the better. Think about it: if your clients are on a monthly fixed-fee arrangement, you’re only ever at risk for that one month’s work.

Josh couldn’t agree more, adding: “In order for accountants to be able to serve their clients, they need to put on their own oxygen mask first. Accountants should be automatically getting paid on a recurring basis so they have the cash flow necessary to pay their employees and keep their firm running. Without managing your firm's cash flow properly, your firm won't be around when your clients need you most.”

Unsurprisingly, Carl has a very similar perspective: “As accountants, we can only look after our clients if we look after ourselves first. Having a strong grasp over our own cashflow is the least that clients would expect of us, and there’s nothing worse than the feeling that occurs when you do work for a client but don't know if you'll actually be paid. By moving to a pre-agreed fixed-fee engagement, with payment details secured upfront, you can minimise both the risk to your business and the potential for future fee disputes."

Take payment details upfront (wherever possible)

Ideally, this move to fixed-fee invoicing should be done with a mechanism that allows you to take payment details in advance. Once a price is set and agreed, there are very few reasons why payment details cannot also be provided. This is the best form of protection for an accountant. It ensures that we get paid for all the great work we do to support businesses and business owners. Most importantly, it puts us in control of our own cash flow.

As an industry, let’s start 2021 by putting an end to trade credit troubles once and for all.

Rebecca Mihalic is the Director of businessDEPOT Sydney, an Australian Registered Tax Agent, a member of the Chartered Accountants Australian and New Zealand and a member of the Institute of Public Accountants. She has been working in public practice since 2003. Rebecca was a co-founder of Aptus Accounting & Advisory which was named the 2018 Innovator of the Year at the Australian Accounting Awards.

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Rebecca Mihalic

Head of Accounting (APAC) at Ignition and Director  businessDEPOT

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Published 12 Jan 2021 Last updated 19 Mar 2024