CPA firms are often reluctant to give too much thought to their billing practices. But when firms fail to pay enough attention to billing, they can fall into bad billing habits, such as writing off unpaid balances, underbilling, or setting fees too low. Mistaken beliefs around billing, such as the idea that lowering fees and billing rates will persuade clients to stick around, can also lead firms to charge less than they should.
Due to the COVID-19 pandemic, many firms have another aspect of billing to contend with: They modified their billing methods for clients whose businesses were struggling. "We try to enter into payment plans to keep the flow of cash going," said Bill Pirolli, CPA/CFF/PFS, CGMA, a partner at DiSanto, Priest & Co. in Warwick, R.I. "Regularly scheduled small amounts add up over time and help the client back on their feet while making it possible for you to continue service."
Though billing can feel like an unpleasant topic to attend to, it is a necessity, and firms can lose revenue if they allow the wrong billing practices to continue. Ultimately, billing missteps can have an impact on the bottom line. Four experts, Pirolli among them, define the most widespread billing myths and outline better practices:
Myth: 'I'm just doing accounting work, and it's not worth that much.'
This myth is all too common. Many CPAs place too low a value on the services they provide.
"Proper billing has a lot to do with having self-confidence in your value," said Marc Rosenberg, CPA, president of The Rosenberg Associates, a CPA-focused consulting firm in Chicago. "As a CPA, you are a highly trained professional providing critical services; never undervalue your worth."
Joseph Tarasco, CEO and senior consultant at Accountants Advisory Group LLC, whose firm has offices in Cold Spring, N.Y., and Bradenton, Fla., recommends that CPAs do more value billing, invoicing clients for the perceived worth of their services in the marketplace, versus basing their fees strictly on hours spent on the tasks they perform. Most clients, he said, aren't as concerned with the hours it takes firms to complete engagements as they are with the value they receive.
Myth: 'Clients are fee-sensitive, so we can't charge too much or raise fees.'
CPAs in general are "reluctant to raise fees in fear that there will be a rebuttal from the clients, or even clients leaving," Tarasco said. However, he said, it's usually a "perceived lack of value" rather than fees alone that causes clients to leave.
The bottom line, Pirolli said, is that underbilling can create problems down the road. If you continually undercharge, it sets the tone and makes it difficult to raise fees later, he said.
Myth: 'I'll underbill with the hopes of getting bonus work from the client.'
You may think you'll get added work from certain clients if you cut them a break. But if you underbill, "you've just set the [expectation] that you'll work cheaply," Pirolli said. "If you communicate your value appropriately, you won't have to discount to get more work."
Myth: 'If I lower my fees, I'll retain clients.'
"Don't be so fast" to lower your fees, Rosenberg warned. "Once you discount, the client will forevermore ask for more discounts," he said. "Once you turn on the faucet, you can never turn it off."
Most CPAs "unintentionally underestimate" and end up doing more work than expected, he said. "Build in a cushion in every quote," he advised, and strive to be a higher-priced, lower-volume firm — not the other way around.
Firms in general are being more cautious than they were before the pandemic to "only do work for clients who are financially strong enough to afford their fees and pay for them," Rosenberg said. But if you know that some clients might have difficulty paying their invoices on time, "it may make sense to work out an installment payment plan before commencing work," Tarasco said.
Myth: 'The engagement letter doesn't matter.'
Some small-to-midsize firms fail to provide upfront engagement letters for their clients, which is poor practice, said Mark Wille, CPA, president of Mark F. Wille, APAC, in Newport Beach, Calif. It is important, he said, for engagement letters to be "well thought out and well described for clients so that they understand clearly the services to be provided for certain fees.
"The more upfront you are with a client and talk to them about the billings as you go, the better off you are going to be," he said. "Good communication makes for great relationships."
Tarasco advised that firms "require retainers from clients, especially with high-risk payers, before proceeding with the engagement," and make sure engagement letters clearly outline payment terms and penalties should clients pay late or not at all. Finally, he said, make sure these letters are signed before you start the work.
Myth: 'It's OK to send bills months after the work is completed.'
"Wrong," Tarasco said. If you delay billing for months, he said, you forfeit the window to raise your fee based on any unanticipated extra or out-of-scope work you completed.
"People have short memories," he said. "Trying to put the facts together months after the additional work was performed makes for a difficult negotiation at that point." He also advises that firms closely monitor work-in-process and accounts receivable throughout the year and then bill as soon as the work is completed.
Also, bill often. "Don't let your time pile up to the point where you have to send one large bill," Pirolli said.
Myth: 'I should send detailed bills to clients.'
Not true, Rosenberg said. You don't need to provide an itemized list that articulates which personnel did which work and for how many hours.
"The more detail you put on the bill, the more fodder you give clients to question," he said.
If you're concerned about whether you are providing enough value to your clients, ask them if they are happy with your work and if you charged what they were expecting.
Myth: 'If I pester clients with collection calls, I'll anger them.'
"Balderdash!" Rosenberg said. It's critical to bill clients early and ensure they pay by the due date. "If you let them pay your bills late," he said, "they will always pay your bill late."
Myth: 'I should strive for a 100% realization rate.'
Expect some clients to always pay their bills without issue. Others may grumble occasionally about fees. All of this should add up to a blend of about 85% to 88% realization, meaning your fees are likely set appropriately, Rosenberg said. If nobody is protesting and you reach a 100% realization rate, you are likely underselling your value.
Myth: 'The partners should do the billing.'
"The billing should be done by managers or senior managers," Tarasco said. "Let them capture all of the time, prepare the bill, and have the partners review."
Managers are intimately involved with the work, he explained, and can help identify additional billings for the partners to approve. Managers are also eager to impress their supervisors with accurate and detailed billing and can help generate more revenue for their respective firms, he said.
Also, partners should not set their own billing rates, Rosenberg said, since different partners with the same level of experience may set different rates for the same work. "The firm should set the billing rates for everybody," he said.
About the author
Cheryl Meyer is a freelance writer based in Minnesota.
To comment on this article or to suggest an idea for another article, contact Courtney Vien, a JofA senior editor, at Courtney.Vien@aicpa-cima.com.
- "Why Firms Shouldn't Just Pay CPAs Based on Their Billable Hours," CPA Insider, Oct. 30, 2017
- "How Implementing Value Pricing Can Help Your Staff Get More Done," CPA Insider, May 30, 2017
- "Professional Liability Spotlight: Buckle Up: The Importance of Engagement Letters," JofA, Dec. 2014
- Addressing Complicated Client Concerns (free to AICPA members)
- Overcoming Pricing Objections tool (free to Private Companies Practice Section (PCPS) members)
- YOU Are the Value workshop (free to PCPS members)
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