Dealing With Clients in Financial Distress
Tips to help manage collecting receivables.
March 8, 2010
Managing receivables is difficult in the best of times and these challenges have been made even more difficult by the current economic environment. But there are several steps your CPA firm can take to help collection efforts.
Get a handle on billing issues at the outset. First, send out invoices in a timely manner. Invoices are more likely to be paid when the value of your services are still fresh in mind. And the earlier an invoice goes out, the earlier it will get paid. Second, if your client has certain requirements or guidelines for processing payment, find out what they are up front (this can be particularly important for companies requiring the electronic submission of invoices, which is becoming more prevalent these days). Third, provide clear explanations of the work performed and if the invoice is likely to draw complaints from your client for being out of line with estimated costs, a phone call to them with an explanation before the invoice goes out can help eliminate surprises.
Once the invoice is out and becomes overdue, follow-up regularly. Don’t just send a balance overdue notice. Speak directly with your client and try to get an explanation for any significantly outstanding balance, which may provide some guidance as to how concerned you need to be. Also, a standard form letter is easier to ignore than a personal phone call. Make sure your client understands the importance of the work you are doing for their business and that you are one of their more important service providers. Chances are the client may be juggling various vendors all clamoring to be paid and this can help move your firm to the top of the payment list.
If your firm does not do so already, consider setting reserves for any anticipated uncollectible amounts. This is an art, not a science and the amount reserved may depend on the client’s financial condition, payment history, whether any amounts are disputed and myriad other factors. Also consider setting an across-the-board reserve for all receivables based on collections history. For example, if in any given year the firm is unable to collection three percent of total billings, consider reserving three percent of total receivables.
Watch for Red Flags
Throughout the engagement, keep a lookout for red flags that payment problems may be ahead. Is the client hinting at financial difficulty, are they complaining about work product or have they more aggressively demanded that your firm adhere to a budget? Did the firm’s large corporate client recently submit a Form 8-K with the U.S. Securities and Exchange Commission (SEC) stating that it is unable to make a large loan payment coming due? Try to assess and address these issues before they become problematic.
If a client is in jeopardy of declaring bankruptcy, consider timing issues. For example, payments made 90 days before the bankruptcy filing are typically considered preferential payments (or preferences) and subject to certain exceptions, the bankruptcy trustee may file suit against your firm for repayment. If there is a retainer being held by your firm, consider when to best apply it to any outstanding balance.
Also determine whether any significant engagement milestones are approaching, such as a deadline for an audit report. And then consider whether your firm should stop work or at least inform the client that you will need to do so if an outstanding balance is not brought current.
Consider Dispute Resolution Options
When disputes elevate to the level of client dissatisfaction or where there is even the possibility of such elevation, consider having a colleague sit in on meetings or calls with the client to discuss overdue fees. Some firms have a designated workout partner who fills such a role, while more often it may be done on an ad hoc basis. Either way, that colleague can help diffuse difficult situations, represent the “firm’s” position (as opposed to the individual engagement partner) and oftentimes mediate a beneficial resolution. And if litigation ever develops, it may be helpful to have a second person as a witness to conversations with the client.
As part of the collections process, clients may request discounts. If the discount is based on dissatisfaction with service, consider obtaining a release of liability in connection with any reduction in fees. Consider whether a discount can be tied to the prospect of future work or used as a credit against future services, which is more likely to guarantee your firm that future work. Restructuring payment terms is also a frequent request by clients in economic dire straits. If the firm and client agree to new payment terms or the scope of the engagement is revised due to budget issues, you may want to document these new details in an amended engagement letter or agreement.
If legal action becomes necessary, weigh the pros and cons. Unfortunately, a common response to many collection lawsuits is a counterclaim accusing the CPA of malpractice. This brings additional costs and expenses of its own and therefore careful consideration must be given before suing a client, who is soon to be (if not already) a former client. If legal action is required, be sure to review the engagement agreement. This is, in essence, the contract on which the firm would be suing and should be the starting point for analyzing the firm’s rights. For example, does the engagement letter provide for the recovery of attorneys’ fees, are fee disputes subject to arbitration and is the firm entitled to interest on unpaid amounts? These answers may dictate whether legal action makes sense.
Communication with clients is one of the keys to collection. Keep them informed from the start and address any potential collection problems up front. This may be the easiest way to prevent them from becoming actual collection problems.