The 2022 recession is upon us, and there’s no way around it. From working with them closely, it’s apparent that the smaller accounting and bookkeeping firm owners are more concerned about the upcoming economic downturn, as they’re probably going to be taking a bigger hit than the larger firm owners.
After all, as small firm owners, what we collect in revenue directly impacts our livelihood: How much we can spend, grow, pay employees, and even how much we can take home at the end of the month.
While there are a few ways for your firm to survive a recession, the common denominator is to ensure you have the funds to pull through this time period.
The following pages are full of many sources and insights I would have loved to read when I first started managing my own business, where I provided growth and strategy consulting services to other companies. I could’ve saved myself countless hours of hassle and headaches caused by chasing clients at the end of each month to get paid (no matter how much value I provided).
This guide is designed to help you find where you’re losing money so you can maximize your profits from ‘money-on-the-floor’ opportunities in your firm. You’ll know how to identify and correct the same mistakes I see happening over and over again while working with small (and large) Bookkeeping and Accounting firms, and you’ll have the extra funds to help you get through this market downturn.
What Most Firm Owners Fail to Realize.
Most firm owners aren't aware of the opportunities they have in-house to improve their cash flow and strengthen their bottom line. Many owners may think the answer to optimized profits lies solely in increasing their customer base or upselling their clients on added services. In reality, changing the way you address your billing and collections can drastically improve your margins.
Over the past few years, I’ve been working on developing Anchor, an AR automation platform used by bookkeeping and accounting firms across the United States (you can read more about it here). Naturally, this requires me to have a deep understanding of everything B2B accounts receivable and accounts payable related. After every call I have with a firm owner telling me about their current billing and collections process, and with each new piece of information I consume, leads me to the same conclusion:
B2B Payments are Broken!
While this might sound a little dramatic, let me be more exact: The current B2B billing and payments process just doesn't align with the way we operate in today’s modern, tech immersed, business, and personal life.
Today’s B2B billing and payments processes are still based on an old-fashioned world, where computers and tech don’t exist, and where people need to go through papers manually to bill clients and make payments.
But this shouldn’t be the case. I know this as the way B2B AR and AP happen today, is in complete contrast with B2C payments. In the consumer world, Venmo (and others) exist, processes are automated, and funds are easily transferred from one bank account to the other, with no human involvement aside from quick agreements and approvals. B2C Billing and payment have become almost ‘human-element’ free.
Just to help you visualize how deep the contrast is, think of your latest Netflix bill (have you even checked it recently?).
Now close your eyes and imagine what billing and payments would look like if Netflix were operating in a B2B AR & AP process-based world:
There would be a Netflix clerk, sitting in an office space filled with tens of other Netflix clerks, typing into an online invoice your payables for the month, and then sending you the invoice hoping you’ll eventually pay it.
He might call you a few days after your billing due date to remind you that you haven't paid your bill yet, and ask you gently when you plan to pay it, as they have their financial reports coming up and 70% of their clients haven't paid their bills on time.
Sounds laughable, right?
Well, B2B Payments continue to be conducted in an ‘old-fashioned’ manner, fully reliant on humans and manual work when it comes to crunching in numbers, data, info, and more.
Sure, some of these processes have become digitized and are done on computers, but they still require a human to be involved.
So how do we make sure we maximize our profit, keep track of everything we’re owed, and get paid on time, every month, on the billing due date? By updating AR and AP processes, introducing them to the 21st century, and utilizing the amazing tech capabilities we have available to replace manual, tedious, and error-prone processes.
Setting the Scene
The first thing I would recommend to accounting and bookkeeping firms (and really, every business), is to automate their accounts receivable, which can solve all the challenges mentioned below and will immediately change the way you conduct your billing and collections, which will result in increasing your profit.
When I first founded Anchor, it was as a result of suffering from late payments in my other businesses and rolls. My goal was to develop a solution to eliminate late payments and get service providers paid on time every month. But over the past couple of years, as Anchor was being widely adopted by Bookkeeping and Accounting firms across the U.S., we understood how AR automation is actually eliminating many cashflow related challenges.
While I haven’t found public stats by other software companies, I do know that for a business billing over 100 invoices a month, Anchor’s AR automation platform can save north of $90K a year! By eliminating all of the phenomena below.
Here's How to Maximize your firm’s Profit:
1. Put a Stop to Revenue Leakage
According to EY, accounting and bookkeeping firms lose around 1- 5% of their top-line revenue (EBITA). In 2021 alone, there was a reported average revenue leakage of 4.6% (2020 Professional Services Maturity). This can translate into a profit increase margin of 25-40%. That’s right! If you earn $1,000 at the end of each month, you can take home $1,400 in profit.
Now that we’ve established there’s a way to increase your profit by blocking leaking holes, what is revenue leakage?
In short, revenue leakage refers to revenue that has been earned but is lost before it can be realized. Forbes explains the main causes being excessive expenses, cash flow delays, revenue barriers, and delayed earnings, among other factors. One of the most significant sources of revenue leakage is improper billing which can come from unbilled goods and services, under billing, late billing, and billing errors. If you have an Accounting or Bookkeeping firm driven by recurring revenue, billing errors will be carried over to the next cycle too.
This major problem can be solved easily by automating your billing and collections with a comprehensive, end-to-end automation platform.
In the meantime, make sure your team is tracking all the work they do for clients, every weekend communication that comes in, and every last-minute request made.
Make sure to track changes and update your invoices accordingly. You should be making records every time you raise rates, add employees, perform extra work for clients, or add urgency rates or early delivery fees to your bill. And that’s just scratching the surface.
You can read more about revenue leakage and how to avoid it in our blog. Don’t forget, what may seem a little bit of revenue forgotten at the top line, is clear profit you can take home.
2. Eliminate Late Payments (Without Chasing Clients)
What if I told you small businesses wait an average of 72 days before their invoices are paid? How about the troubling fact that 92% of businesses pay suppliers late? Pretty shocking, right?
Well, there are some steps you can take to try and eliminate late payments.
The most effective and long-lasting solution is to automate your entire billing and collection cycle to ensure timely payments, all the time.
If you’re not using AR automation, I’d recommend you try to bill upfront for whatever you can.
Make sure you always keep a payment method on file and make it clear to new customers that you will be using this account information to independently charge for your service in the event of a late payment exceeding a minimum amount of days overdue.
The good news is that most of your clients do want to pay you on time. In fact, only 3% of late payments are caused by bad intentions.
The majority of payment delays have to do with your clients’ current accounts payable (AP) processes, that are in place to ensure your bills don’t include any errors, double invoicing, or fraud. With that said, the traditional AP process (like manual AR) is a hefty and lengthy process that usually ends with you having to wait for overdue payments.
When using traditional AR and AP methods that are reliant on manual work, the process is bound to be time-consuming, expensive, and inaccurate. Even the most talented accounts receivable professional will take a considerable amount of time to search for billable invoices, look up contractual terms, generate invoices, and send them out. The client has to go through just as many steps (if not more!) to avoid risks such as fraud, errors, and duplicate payments which all stem from, you guessed it, manual billing.
Want to know what the AP process looks like on the other side? Well, first and foremost, your clients go back to the original email you sent them to double-check the terms of the agreement. They make sure the invoice terms such as billing date, upfront cost, and other factors line up.
The next step is verifying the invoice’s calculations, checking the origin of the invoice, searching for indications of fraud, and ensuring the invoice hasn’t already been paid since 1 in 20 invoices are accidentally paid twice.
Clients don’t typically have the bandwidth to go through this whole process. If any red flag starts waving, the issue is usually put to the side as a to-do without being given priority.
The closer your accounting and bookkeeping firm is with clients, the more the customer will feel comfortable waiting to address the problem because there’s a higher level of trust. In bigger companies, there are even more steps and people involved which leads to more complications and potential delays
Most late payments are caused due to manual AR and AP. The best way to avoid this is to automate the AR process which automates the AP process too.
When using traditional AR and AP methods that are reliant on manual work, the process is bound to be time-consuming, expensive, and inaccurate. Even the most talented accounts receivable professional will take a considerable amount of time to search for billable invoices, look up contractual terms, generate invoices, and send them out. The client has to go through just as many steps (if not more!) to avoid risks such as fraud, errors, and duplicate payments which all stem from, you guessed it, manual billing.
Want to know what the AP process looks like on the other side? Well, first and foremost, your clients go back to the original email you sent them to double-check the terms of the agreement. They make sure the invoice terms such as billing date, upfront cost, and other factors line up.
The next step is verifying the invoice’s calculations, checking the origin of the invoice, searching for indications of fraud, and ensuring the invoice hasn’t already been paid since 1 in 20 invoices are accidentally paid twice.
Clients don’t typically have the bandwidth to go through this whole process. If any red flag starts waving, the issue is usually put to the side as a to-do without being given priority.
The closer your accounting and bookkeeping firm is with clients, the more customers will feel comfortable waiting to address the problem because there’s a higher level of trust. In bigger companies, there are even more steps and people involved which leads to more complications and potential delays
Most late payments are caused due to manual AR and AP. The best way to avoid this is to automate the process for both sides.
3. Slash Software Costs
Although software is a growing cost for firms, it’s also one of the easiest spaces to reign in spending. In 2020, the State of Small Business Payments survey found that 61% of firms increased the amount they spent on technology in the past two years.
While that might be justified for other operations, when it comes to billing and collections, accounting and bookkeeping firms commonly duplicate their software use which leads to redundancy and unnecessary costs.
So, while you might try to increase efficiency by combining a few software to achieve different workarounds and shortcuts, (that usually end up being patched together with Zapier and Duct tape), this alone can cost hundreds of dollars to accomplish.
Aside from high costs, this problem is creating a messy, complicated, and inefficient accounts receivable process. This makes it more difficult to track cash flow and stay up to date with bill processing.
You can greatly reduce costs and improve productivity by finding a single, comprehensive software to automate your entire account receivables process. Make sure it feeds back into your GL so it can cover reconciliation too.
Automated AR solutions should also charge you little to nothing on ACH transfers and CC use. Look at the small print to see what limitations are in place with your subscriptions with a specific focus on the number of invoices and proposals you’re permitted
Finding the right software to manage your firm's cash flow can ensure you’re recession ready and more importantly, provide you a clear picture of where you’re at and a prediction on your firm’s right path to growth.
4. Automate Manual Admin Tasks (Avoid Wasted Time)
As a firm owner, the more you increase your amount of billable hours, the more profit you’ll make. In other words, your time is literally worth money. This also means that every minute you and your team spend on performing non-billable tasks is money down the drain.
As we’re going into recession, it's crucial to focus your employee’s time on your firm’s growth, maintaining quality services, and growing your client base. You can’t afford to waste valuable billable hours. With Manpower becoming more expensive and less attainable (especially during the great-resignation wave we’re still experiencing), You need to make sure your team’s time is committed to revenue-producing tasks. Newsflash! Billing and Chasing clients down for late payments isn’t one of those profit-driving endeavors.
In fact, estimates suggest that sending 100 invoices requires a full-time admin- which is an extra salary going on non billable hours. Plus, most small firm owners are still incredibly involved in the billing, payments, and reconciliation process in their business. I just spoke to a practice owner last week who told me he still spends at least 4 days a month (once a week), with his in-house admin, on making sure everything is going smoothly with his billing and collections! And this is extremely common.
By using an end-to-end AR automation tool, you make sure no time is spent on manual tasks that can be performed with software and that that time is spent on business growth-related tasks.
Automation will help you slash other costs too. For example, according to Concur, it costs businesses $12.90 on average to process a single invoice. The Accounts Payable Network, via Beanworks, notes that the average cost to process a single invoice is closer to $15. The experts listed above have agreed that automated invoicing is significantly cheaper. Sterling states that fully-automated invoices cost just $3.50 per invoice to process. (With Anchor, it’s actually possible to reach $0 per invoice).
AR automation ensures you get paid, on time, every time with minimal manual work needed from your side. You won’t have to spend your or your team’s time on doing billing, chasing down clients and if you’re using Anchor, you won’t need to spend time on reconciliation either.
The Bottom Line (No pun intended):
As mentioned above, B2B AR and AP processes are broken and are costing firm owners thousands of $ a month, as they are reliant on manual labor and human action.
We’ve mapped out the 4 fastest ways for you to increase profit without increasing your client base, and I really hope this post helped you understand that there’s no reason to continue using outdated processes under the pretense of ‘the cost of doing business.’
The cost of owning and managing your business should be reduced to the necessary COGS only and for the rest, there’s the 21st century, and the wonder of tech and automation.
Please reach out to me with any questions or reservations you may have about AR automation- I’m happy to help and there’s literally nothing I love discussing more!
