Cash flow warning triggers for professional services

Professional service providers typically include lawyers and accountants, medical professionals, real estate agents, financial planners, finance brokers, insurance brokers and various support businesses. People working in professional services have in common the need to invoice an hourly rate for time spent, where the work is usually completed in advance. Doing the work and then waiting for payment means it’s crucial to have warning triggers in place for advance notice of any cash flow stress.

Avoid cash flow stress by setting red flag thresholds to notify you before it’s too late. 

Sales triggers

Professional services rely on sales from existing and new customers. Unless you have a sharp revenue shock from a crisis, it’s difficult to pinpoint what’s causing deteriorating revenue.

Common sales indicators might include:

• leads, calls, queries, demos, meetings booked or foot traffic.
• repeat business as a percentage of sales.
• web traffic and social media activity.
• revenue per employee.
• time billed each month.

By monitoring these sales drivers, you can better identify potential issues and take corrective action. It’s important to note that every industry will have its own specific characteristics. 

Financial triggers

These alert you when data suggests you may encounter a cash flow problem from internal dynamics. Use real-time financial data for each project, including cloud software, to keep everyone on task.

Billing cycles start to lengthen

Sometimes it takes time to get paid when you finish a project. Billing cycles can blow due to late entry of work, last minute project changes, long or complex review processes, customer disputes about fees or complicated invoices which need explaining. 

Decreases in time billed

The billable time each employee spends on projects often determines the success of your business, so maximising these hours is crucial. If employees need to remember their input time, lost minutes can add up to hours so adopting industry time tracking software is a must. Sharing your dashboard of billed time with staff will help identify who is underutilised and needs to pick up more hours.

Hours written off increases

You may need to delete hours worked on a project, due to a disputed charge or for redo-ing work that was wrong or miscommunicated. ‘Scope creep’ can impact hours billed, where the customer changes the brief in the middle of a project but doesn’t consider the extra cost of time. They may dispute the final hours billed, requiring a compromise, ending in some of the time written off. Make sure you’re crystal clear as soon as these instances raise their head.

Delayed payment collection

The longer a customer doesn’t pay, the greater the chance of having to write it off as a bad debt, negotiate a payment plan or agree to reduce the cost. Check that you’re aware of the payment process of your customer.

Incurring expenses before collection

For many professional service companies, the most significant costs are employees who need to be paid regardless of your cash situation. If your business finds it’s impossible to make payroll and you have exhausted financial lifelines such as lines of credit, overdrafts or an injection of capital, you may need to reduce your headcount which will have delivery and expertise implications.

Business triggers

It’s not always hard financial data that can signal a cash flow crisis ahead. Sometimes minor issues fall between the cracks, which may not be too concerning on their own, but add up over time. These include:

• Disinterested or bored employees, causing in-fighting, minor arguments or disruptive in-house politics. 
• Growing customer dissatisfaction, returns, refunds and complaints that hint at poor delivery or fulfilment.
• Increased downtime (staff or machinery) from inefficiency, poor scheduling or mismanagement.
• An increase in sickness, absenteeism or staff turnover indicating unhappy employees.
• Inexperienced staff are assigned tasks which take longer than anticipated or they don’t have the skills to complete.
• Senior managers spend time on low-value work that should be completed by someone more junior.
• Reliance on one or two large contracts, which, if they change delivery times or pay late, will have much more impact on cash flow than many smaller clients. Balance your customer base.

How to set up a cash flow warning system

Once you’ve identified the cash flow warning triggers most relevant to your business, set up a monitoring system by automating the data thresholds you want to measure. 

• Only set a few triggers. Pay attention to the two or three drivers that significantly affect your business performance, are measurable, can be compared to a benchmark such as last year’s data figures, and can be acted upon.
• Invest in accounting and industry software to automate your processes and generate reports that highlight cash flow issues. Set alerts for when invoices are overdue, payments are delayed, or expenses exceed a certain threshold.
• Keep up with cash flow projections to anticipate potential issues. 
• When work has been costed, agreed and contracted, spend time up-front on how resources are allocated and progress is managed. 

Responding to cash flow warning triggers

When a cash flow warning trigger is activated, you should immediately mitigate the issue. Steps might include:

• Review invoices to identify discrepancies or errors that cause cash flow issues. For example, if a customer disputes an invoice, it may delay payment and cause cash flow problems.
• Negotiate alternative payment terms when customers are having trouble making their payment obligations. Setting up a payment plan or accepting partial payments will help improve cash flow and maintain a good relationship with the customer.
• Reduce expenses to improve cash flow, including negotiating better prices with suppliers or reducing discretionary costs such as travel and entertainment.
• Increase revenue by exploring new business opportunities, cross-selling services to existing clients or raising prices.

How NAB can help

Warning triggers only work when you can compare them to past data. Use any past figures as a benchmark for current performance and compare yourself with other similar businesses, especially competitors. Your accountant, bank manager, or industry association may be able to supply industry benchmarks.

We have tools to help you set up your cash flow warning system. Try our template for effective cash flow management to get started.