Wednesday, January 02, 2008

Post War Blues

Welcome to 2008! Depending where you on the planet you could have been recognizing the birth of a New Year as much as 24 hours ahead of the rest of the others. Through the festivities to ring in the New Year, there will be hopes, dreams and resolutions for the New Year. At the same time, there will be memories of the ending year.

For those firms with a December 31st year-end, the stress and anxiety of the final day in 2007 is now history. For accrual-based firms, the mad dash was to get the work in progress converted to accounts receivable. While for cash-based firms, the goal was to get as much accounts receivable converted to cash as the budget dictated. Regardless of the type of goal, the deadline has past! At this point, there is nothing you can do to alter 2007. Now, depending on your organization, you will be faced with the year-end audit; the numbers are what they are!

A faint memory of my days in public accounting, I recall that auditors were those who came in after the war was lost and bayonet the wounded. For many, the war was considered lost when the actual outcome was significantly different from the budget. I would guess that today, many finance people are reflecting on their firm’s 2007 goals, their degree of success, while many are feeling quite wounded. Regardless of when you return to the office, the remnants of 2007 will be everywhere and the task of clean up and starting a new year will begin. I am reminded of those feelings; post the April tax deadline when in public accounting and post December 31 when I was at a law firm. The medical world had identified those feelings and labeled it as postpartum depression. Although medically it relates to something significantly different, I can identify with the symptoms. It is the day after the war, the point when all stress and anxiety has diminished and only a sense of emptiness remains.

Over the coming weeks those feelings of emptiness will wane and will eventually be replaced by the day to day excitement of the New Year. We will settle in on becoming aligned with our new budgets and our new goals for 2008. By mid-February we will vaguely remember the long hours, the stress and the adrenaline rush of the last 90 days of 2007. The most important thing we will bring forward from 2007 will be our old habits and 2008 will unfold as 2007 had. It is important to realize that there are many roads to success in order to meet expectations. However the path chosen is what's very important. In achieving the goal of a certain profit figure, one could increase the revenues, decrease the expenses or affect both the revenue and expenses at the same time. Regardless of how you get to the goal, some roads to success are less burdensome. Maybe 2008 is the year to try a new path.

Over the years, I have written a lot about the year-end crunch and how it is the time bomb of insanity. On those occasions I brushed on doing things new and in different ways. I would encourage you to kick 2008 off with a paradigm shift; a radical new way to look at your business and the management of inventory and cash. Isn’t now the perfect time, as we are forming the foundation to December 31, 2008? In my earlier writings I basically outlined that there are only 3 reasons why clients don’t pay bills: relationship, billing and economic. I have also professed that not all clients are the same, therefore a one size fits all credit and collections policy simply doesn’t work! Therefore to make a radical impact on cash receipts, firms should look at their policies and practices as they impact the key reasons why clients don’t pay.

The first step down this paradigm shifting experience; recognize that all clients are not the same! Recognize that the world is constantly changing. Your cash flow is directly related to the economics of where you operate, the clients and how the economy affects them. The foundation must begin with a credit policy, a policy that recognizes a dynamic economy affecting your firm and your client’s operation. Now is the time to set a credit policy, not a policy where any client can be extended any amount of work. But a policy that looks at how much risk, in each client, the firm is willing to absorb. The credit policy will form the basis of the collections policy, which will determine how the process goes from billing to ultimate cash receipts. From here, firms must establish benchmarks and milestones throughout the year to ensure they are on target.

According to Dr. Charles Gahala, CCE, Professor of Finance at Benedictine University, setting milestones and benchmarking performance are some of the best tools available to identify focal points for improving credit deparment operation. Dr. Gahala goes on to state, in his article Practical “Best Practices” to Integrate Benchmarking into the Credit Department, that the setting of milestones and firm management through benchmarking requires the buy-in of top management. Basically, the entire partnership must be in full agreement that the new process of establishing a reasonable credit and collections policy and its monitoring, is what is needed to achieve the desired results, without the anxieties of the past.

Terry Callahan, CCE in his article Benchmarking to Measure your Performance, makes a very strong statement in “Tell me how I am rewarded, and I will tell you what my focus is”. The partnership must recognize that the better way is at their disposal. However, it takes a leap of honesty to conclude the current methods are not working and a change is needed. With a solid credit policy and a process for collections, today’s firms can reap huge financial benefits without the stress and anxiety of the year-end push. Today’s law firm doesn’t have a problem in communicating, with the voluminous reports that are created each month. The problem with today’s firm is that no single leader exists that is willing to admit that the current methods are simply not working as they have. The old adage hold, if it isn’t broke, don’t fix it. While many brilliant minds of today say, if it isn’t broke, ‘break it” and rebuild it better.

To break away from the insanity of the past, the firm must establish realistic goals and also realize that as the economy changes the means for achieving the goals must change. In 2007, the US economy suffered a series of financial blows in the sub-prime mortgage sector. The economy changed, but many firms didn’t! Today, those firms are now sitting with millions of dollars invested in those sub-prime lenders with really no way to collect. Moreover, those same firms are now overstaffed in corporate groups with associates having no work. I have read about on east coast firm that bantered with the idea of downsizing their corporate group. But there had never been lay-offs in the associate ranks in the history of the firm. Obviously no one recognized the economy changing or they were too afraid to make a change. Too bad!

It is high time that the professional services world looks at the corporate world for direction on how to truly run a business, that is, if the firm wants to run like a business. If you have been a regular follower of my commentary you will recall my reference to Slater & Gordon, the world’s first publicly traded law firm. They took the quantum leap in May 2007 and today they continue to tout their unprecedented growth in profits and increasing market share. Success in today’s firms must now be marked with the words: credit policy, collections policy, profits, milestones and benchmarking. To get the ball rolling, here are some facts from corporate America that set out the road ahead.

1. The median cost of performing the credit function is 0.028% of billing.
2. The average corporate firm will experience AR turnover of 8.88 times per year. That is average days to pay, based on net 30 terms, is 41 days!
3. Most credit professionals manage a portfolio of 700 customers.
4. In corporate America, 52% of companies use an auto-cash application system that automatically applies payment to over 80% of the bills.
5. 52% of all companies assign a risk code to their clients.

Here we are at the fork in the road, we can make 2008 a mirror of 2007 or we can do something different, something better. Now is the time to act, as December will be too late!

“Two roads diverged in a wood, and I -- I took the one less traveled by, and that has made all the difference" - Robert Frost

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