Pricing, billing and collecting fees
What CPA firms can do to run their businesses more efficiently and effectively.
CPA firms provide invaluable advice to business clients but often struggle to run their own businesses effectively, particularly in the areas of pricing, billing and collections. Failure to set appropriate fees, deliver bills in a timely fashion and collect payment promptly—or even in full—cuts into a firm’s profitability, hurting the business and the accountants in it.
Remedying this situation requires CPA firms to make a conscious effort to ensure they get paid an appropriate price in a timely fashion. To best do this, CPA firms should secure the fee agreement upfront, when their value to the client is greatest, and make sure they deliver excellent work on, or ahead of, schedule. If the job requires more work than was expected, the CPA should contact the client as soon as possible to discuss the need for extra fees. When the work is done, firms should deliver the product and the bill at the same time. This increases the chances that the client will go ahead and pay the bill, sparing CPA firms the wasted time and anxiety that develop from having to send statements or hound clients to collect what is owed.
For the firm’s partners, the goal is to free their minds and time for more productive endeavors and ensure that their business is providing shareholders with the revenue needed to compensate staff appropriately and plan for the practice’s growth and the partners’ retirement.
EFFECTIVE PRICING
Pricing is an art, but many CPA firms treat it as a science. Firms often use a time run or fee chart to determine a bill rather than taking the time to understand the value of the services they provide. Exhibit 1 presents a list of pricing techniques.
CPA firms need to review each service they provide and price it accordingly (see Exhibit 2). They should examine what they do for the client, where they add value and how they apply their training, knowledge, experience and resources to arrive at a successful result. Without that understanding, CPA firms won’t bill the appropriate amount, and that usually means they will charge less than they should and could collect.
One way to bill the appropriate amount is through value pricing (see “Pricing on Purpose: How to Implement Value Pricing in Your Firm,” June 2009, page 62). If you choose a value pricing approach, consider including the following language in engagement letters:
“We base our fees on time required at our regular rates for the type of services and personnel assigned plus out-of-pocket costs. We also give consideration to the difficulty and size of the assignment, the degree of skill required, time limitations imposed on us by others, the experience and ability of the personnel assigned, the nature of the project, the level of cooperation by the client’s staff, and the value of the services to the client.”
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A problem develops if the fee is not settled before the work is done. In those cases, the firm loses the option of being able to walk away or to reduce the services.
Further, it is much easier to reduce a quote than to raise it, so CPA firms should increase their price estimates. Don’t be afraid of losing an established client because of a high quote or a high bill for extra services. You can always negotiate a deal. What CPAs often fail to understand is that most clients have a “sunk” cost in their accountant and want to continue that relationship and maintain their “investment.”
Additional revenue opportunities arise when projects require extra work. Keep in mind that clients will want the opportunity to make a decision about whether the CPA firm should perform the work. Informing clients after performing large amounts of additional work makes them feel like they have lost control of the process, leading to complaints about “excessive” fees.
INCREASING FEES
Every CPA firm needs to increase fees regularly. This can be done in many ways, including:
- Calling or meeting with clients to discuss the proposed increase;
- Making a notation at the bottom of the first bill with the increased fee;
- Sending a letter advising of the increase in the current or next bill; and
- Including a clause in the engagement letter saying that rates are increased annually or periodically. These clauses usually provide for no special notification.
Whatever the method chosen, providing clients with an opportunity to discuss an increase, if they have any questions about it, allows for a better working relationship.
Many times, clients will not complain about increases but will ask about them. It is important to respond promptly and clearly, and it is just as important to pick up on any objections. CPA firms need to be sensitive to all client comments about fees and client perception of how much the firm makes. Clients need reassurance that they are not overpaying. Provide that reassurance by keeping diligent records that show the value you provide as well as your costs.
In some cases, clients might say they can’t afford a fee increase or even the current fee agreement. If they truly can’t pay more, the evidence should be apparent—managers taking rock-bottom salaries for themselves and looking to cut costs everywhere they can. In those situations, CPA firms should consider forgoing the increase or adjusting the rate—or be willing to lose the client. This is a business decision that needs to be looked at separately for each situation.
METHODS OF BILLING CLIENTS
CPA firms should establish a billing method that recognizes the importance of the firm’s cash flow. This usually is accomplished by presenting bills as soon as the work is completed. Occasionally, as circumstances warrant, retainers and progress billings are appropriate. View other types of billing methods in Exhibit 3.
Fast billing requires a commitment by the entire firm. Managing and/or administrative partners must convince the other partners and staff—revenue producers and administrative personnel—to buy into the importance of prompt billing. That means partners and staff must treat billing as an essential part of their role and complete it in a timely fashion. When partners and staff fail to accept the importance of prompt billing, they cause delays in cash flow and increase the likelihood that some bills won’t be paid in full—or at all.
Unfortunately, many CPA firms set up billing methods that cater to their internal administrative employees and actually prevent faster receipt of payments. Administrative functions and staff are essential for a smooth-running practice, but systems that cater to back-office personnel at the expense of quicker billing are counterproductive. Some firms have a monthly billing process in which the time charges summary or run is distributed at the beginning of each month for the previous month. The partners and other revenue producers then go through each summary, write out what to bill and how to describe it, and then proof the final bills before they are distributed to clients. In many cases, clients won’t get bills for work completed at the beginning of the previous month until the 10th or 12th of the following month. And then the CPA firm asks the client to pay the bill before the beginning of the next month.
A better method would call for partners and other revenue producers to have the administrative staff prepare the bills to accompany the deliverables. This easily can be done for predetermined fixed or project fees. If the firm’s billing is based on actual time charges, its leadership must ensure the partners and other revenue producers enter their time daily or have the administrative staff call each revenue producer to determine what his or her time was that day. The administrative staff then should prepare bills to accompany the reports or tax returns being delivered. Partners next would review the bill and its backup, along with the report or tax return, before signing off on it. If a partner or another revenue producer questions the amount, it is much better that it happen before the bill is sent and not a few weeks later, when the revenue producer receives the time run and has to remember what was done and under what circumstances.
The administrative personnel might not love this system, because it creates extra work for them, but the benefits are too great to ignore. Most importantly, the process helps to ensure that clients receive their bill at the same time they receive the CPA firm’s deliverable. Clients better appreciate the value of the work—and are more likely to promptly pay the bill— when the product is delivered than if they don’t receive the invoice until weeks later.
CPA firms also can improve the bills themselves. When multiple services are performed, itemize the services and apply a price to each service. An itemized invoice presents the fee in components that allow clients to ask questions about specific charges. This approach works best when doing project billing. Firms on time-charge arrangements either state the total time charge for the period or list each person performing a service with his or her cost.
Regardless, the greater the detail on the bill, the better. It gives the client a feeling of empowerment and understanding.
View sample invoices in Exhibit 4.
COLLECTION EFFORTS
I once saw a bumper sticker that said “Happiness is a positive cash flow.” So true! Effective collections start with presenting the bill promptly, not letting payments lag, following up and asking for payment, and accepting credit cards. Firms also must recognize that a CPA’s fee is never material to the client’s business as a whole but that an accumulation of unpaid past due bills can become large enough to affect the client’s cash flow and make it harder for the CPA firm to collect what is due.
It’s best not to let large debts accumulate, but if they do, a good way to collect high amounts is to ask for one-third payment immediately, one-third in a month and the balance a month later. Emphasize that the payments can be charged to the client’s credit card. You’d be surprised by how many people forget the size of the bill when they can earn extra points or mileage rewards on credit cards. Less than half (45%) of accounting firms accept credit cards, according to the 2010 PCPS/TSCPA National MAP Survey. If your firm isn’t taking credit cards yet, that’s something you should change—and quickly.
Collecting is much easier when the work is delivered on schedule. Further, from a business standpoint, uncompleted work is work-in-progress, or WIP, inventory, which is a firm’s least valuable asset. To reduce WIP inventory, CPA firms should better schedule their work and, if necessary, make frequent follow-up calls to clients to get missing information.
Eliminate extensions and delivery delays. Uncompleted work creates unnecessary rushes, added anxiety, a tense atmosphere and unhappy clients. Untimely work forces the firm to live in the past and derails current-year thinking and planning. Uncompleted or late-delivered work also slows up cash flow.
Another way to improve collections is to make sure clients believe they are getting their money’s worth. Clients measure the value provided by the CPA firm against its fees. CPA firms need to communicate their value to clients. Don’t be afraid to say you did a great job. Emphasize that work was delivered on schedule. Remind clients that they haven’t had a tax audit or problem with their bank or any creditors that have received the financial statements you prepared. Point out how your anticipation skills prevented problems. Work into the conversation how you are always available to take their calls and assist them and how responsive you have been to their new ventures. Also, emphasize the stable and knowledgeable personnel who work on their account.
Communicate with your clients. Never forget that your clients pay your salary, that clients need reassurance of your ability, expertise and availability and that they don’t want to feel ignored. Call clients periodically with ideas or just to see how things are going. You don’t need an elaborate agenda to touch base with a client, and those interactions can lead to new business. Don’t make the only time a client speaks to you be when you call for a past due payment.
CONCLUSION
CPAs must recognize that their firms are businesses that need to be properly managed. A key part of that is establishing and executing an effective billing process that sets the right fees, bills promptly and handles collections professionally. CPAs also need to learn how to communicate their value in a way that shows clients that what they are paying is worth it. Failure to improve an ineffective billing process hurts the CPA firm’s revenue, cash flow and morale. Don’t let this happen to your firm.
EXECUTIVE SUMMARY
Edward Mendlowitz (emendlowitz@withum.com) is a partner with WithumSmith+Brown in New Brunswick, N.J.
To comment on this article or to suggest an idea for another article, contact Jeff Drew, senior editor, at jdrew@aicpa.org or 919-402-4056.
AICPA RESOURCES
JofA articles
- “Hitting the Target: National Survey Looks at How CPA Firms of All Sizes Stack Up,” April 2011, page 22
- “Make Your Accounting Department More Efficient,” Dec. 2010, page 20
- “Pricing on Purpose: How to Implement Value Pricing in Your Firm,” June 2009, page 62
Publications
- Management of an Accounting Practice Handbook (#MAP-XX, online subscription; #090407, loose-leaf)
- You Are the Value: Define Your Worth, Differentiate Your CPA Firm, Own Your Market (#090550)
For more information or to make a purchase, go to cpa2biz.com or call the Institute at 888-777-7077.
Websites
- Profitability and Pricing Strategies (for Private Companies Practice Section members only)
- PCPS Human Capital Center
- PCPS Practice Growth & Client Service Center
On-Site Training
Trusted Business Advisor Workshop (#TAW)
Go to aicpalearning.org/on-site and search using “Alphabetical Index” or “Acronym Index.” If you need assistance, please contact a training representative at 800-634-6780 (option 1).
Private Companies Practice Section
The Private Companies Practice Section (PCPS) is a voluntary firm membership section for CPAs that provides member firms with targeted practice management tools and resources, as well as a strong, collective voice within the CPA profession. Visit the PCPS Firm Practice Center at aicpa.org/PCPS.
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