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Timesheets, Billings, Collections and New Year’s Resolutions

By: John Pruitt

timesheetsProcessing employee timesheets, client billings and collections are truly the “nuts and bolts” of professional service organizations’ administration. How do some A/E firms handle these maintenance functions of their business so easily while others struggle with the same function? Why is it that they take so much time for some firms and so little for others? This article will examine the characteristics of A/E firms that efficiently handle timesheets, billings and collections functions. The article will also examine ideas about what A/E firms can do to improve the maintenance functions to improve profitability.

Now Is The Time…

The economy is healthy in virtually every region of the U.S. Nearly every A/E firm is busy and has a sizable backlog of work. Many firms are experiencing one of the best years ever! So why should A/E firms be concerned about mundane things like timesheets, client billings and collections? One reason: EFFICIENCY!

Those firms that handle the maintenance items such as timesheets, billings and collections efficiently tend to also be the more profitable companies. Yes, they are able to spend more time meeting client needs and running their professional practice. Considering the importance of timesheets (capturing revenue), client billings (informing the clients of the monies due for services performed), and collections (conversion to cash), it is easy to understand how valuable it is to have these maintenance functions working efficiently.

What better time to improve the “nuts and bolts” part of your A/E practice than at the beginning of a new and probably prosperous new year? Most A/E firms would be hard-pressed to find a better investment for its resources than having their time recording system, billing and collection systems working at peak efficiency.

One of the fears that managers of A/E firms have is, “We may lose clients if we tighten our collections policies.” This thinking is somewhat passé. The industry has one of the highest backlogs of work in history. And, perhaps the best reason to tighten collection policies is that the client you happen to lose will be the one who goes to your competitor and drives their profits downward.

The primary function of a job cost system is to capture the necessary information so that the A/E firm can accurately bill clients for services. Before we explore how successful firms use their “time and billing” systems, let us first examine the software used to capture the information.

Software Systems

A/E firms are unique. They have a more complicated “time and billing” system than virtually any other professional service organization. Why? The A/E industry has so many different contracting methods. Payment for A/E services may be based on a number of factors including percentage of completion, percentage of construction costs, negotiated hourly rate scales, negotiated lump sum, or even cost-plus. Add government contracting and the Federal Acquisition Regulations to the mix…the timekeeping and accounting process cannot help but be complex!

A/E firms tend to evolve. Their job cost and accounting needs must also evolve. Most A/E firms start out as a one to three person operation run by former employees of larger A/E firms. They took the “entrepreneurial leap”. Typically, the owner/managers have taken a few clients with them as the basis for their new business. Using a software spreadsheet application such as Microsoft Excel ® or Lotus 1-2-3 ®, they were able to effectively track their projects and gather job cost information. The firm’s accounts receivable listing was typically a single sheet of paper. It was viewed by nearly everyone on a daily basis. Meeting payroll for the owner/managers depended upon prompt collections.

When firms grow to eight to twelve employees, the spreadsheet tracking of jobs tends to reach the complexity where the “wheels start to come off”. Instead of having five jobs in process, there are twenty. There are also more contractual requirements for payment…everything becomes more complex. Accounts receivable is not as easy to track.

At this stage, companies tend to look for a more integrated solution. More sophisticated software is usually the foundation for the solution. Where the owner/managers were once able to know the status of each project and the workload by a daily 10-minute walk around the office, now it becomes nearly impossible to keep up with the status of all of jobs-in-process. Owner/managers also start seeing the benefits of generating client billings from job cost information. They also want a means of knowing where their company is financially… “Are we making or losing money?”

The solution for an integrated information system is software designed for A/E firms. There may be as many as ten software companies that write software packages specifically for A/E firms. They include, alphabetically, Axium (Timberline), BST, Harper and Shuman, Sema4, Sota, and Wind2. The critical factor in selecting A/E software centers around the level of support a firm can count on during the installation process…yes, this is even more important than the initial cost of the software.

More Organization…More Policies

The next growth challenge for A/E firms tends to occur when the firm reaches 20 to 35 employees. Owner/managers find that they need more formalized systems to maintain order and operate their firms. They are finding that they are spending more and more of their time dealing with exceptions, both client related and administrative. The owner/managers also realize that it is more profitable (at least in the short-run) and fun to deal with client or job-related exceptions rather than administrative ones. Owner/managers also find that administrative exceptions can often be more effectively handled by a company policy.

So a 20 to 35 person firm is the size where most A/E firms tend to “get organized”. Yes…typically! Some of the most profitable firms are in the 20 to 35 employee range. Larger successful A/E firms tend to split into branches, divisions, departments or studios of 20 to 35 employees. Aha! It is a span of control and coordination issue. Single business units over 35 employees usually cannot effectively handle the exceptions generated by such a large group.

Let’s get back to some of the “nuts and bolts”…timesheets, billing and collections.

Timesheet Efficiency

At one time, not too long ago, A/E firms had monthly timesheets. The industry gradually migrated to twice a month timesheets due the 15th and the end of month. The moving force behind the change was that some clients insisted that they receive their billings before the end of the month or the payment would be delayed an additional 30 days.

Today, most A/E firms collect and process timesheets weekly. Yes, administrative staff time increases to process weekly timesheets. However, the gains from weekly timesheets over twice a month timesheets offset the increased administrative time. The best testimonials about the value of weekly timesheets come from manager/owners of firms who have recently switched to weekly processing. The author has not heard of a single A/E firm that has made the switch from twice a month timesheet processing to weekly that wanted to switch back to the old method.

Some firms are constantly challenged with getting employees to accurately complete their timesheets while other firms have “no problems”. What is typically the difference? It is usually a combination of expectations and self-discipline. The attitude of management in firms that typically have no problems is…”If I can accurately fill out my timesheet with my busy schedule, then they can darn well do it too! After all, they do have a college education.” Yes, the leaders set the pace!

More employees are successfully filling out timesheets “on the fly” rather than writing the time in a daily calendar and then transferring the information at the end of the week. Also, owner/managers are expecting employees to fill in their timesheets throughout the day, not only at the end of the day. There is a direct relationship between how often an employee records project time and the amount of billable and collectable client charges that are recorded. The more often during the day employees record their time…the more chargeable time will be recorded. As a corollary to this fact, the better the description of the work performed at the time of performance, the easier it will be to bill the client. In summary, timesheets need to be completed several times a day, and the information recorded must be complete and accurate.

Now let’s consider the timing of timesheet submittals. Most firms have timesheets due on Fridays…say 5:00pm. Some firms actually expect all timesheets to be approved and submitted for processing by that time, while others are satisfied with having timesheets submitted by 9:00am Mondays. Then there are some firms that are happy to get the last timesheet submitted by Tuesday afternoon. Here again, it is a matter of expectations and discipline.

One owner/manager explained his feelings and expectations about timesheets as follows:

“Timesheets are like brushing your teeth or combing your hair…it is part of the basic requirements of your business life. Just like you wouldn’t come to work without getting dressed, you don’t leave here [the workplace] without completing your timesheet. It is a matter of developing good and thoughtful habits.”

Another owner/manager had a more proactive approach:

“All employees, yes, including the other owner/managers, submit their weekly timesheets to me. If there is one missing, I personally stop by the employee’s office and collect it. I never have to do this twice.”

Think of the difference that it would make within your firm if time sheets were submitted correctly and on time. Compare this with the picture of a firm that takes that extra day and a half to accomplish the same basic requirement of a business. What a great New Year’s resolution for a firm…making timesheet submittals a routine function rather than a day and a half grind.

Timesheet Automation

An automated timesheet system is a means where all employees record their hourly time electronically. Instead of writing their time on a timesheet, they type the information into a computer.

Most A/E software vendors are offering automated timesheet entry. The logic behind automated timesheets is to eliminate the need for employees to transcribe the information from a day-planner system to their timesheets; and then have another person input the information into the job cost system. The key aspect of a good automated timesheet system is the following: The automation does not just shift administrative functions away from the administrative staff, rather, it eliminates the function!

While automated timesheets were not a viable option ten years ago, it is now more a question of “when” rather than “if” an A/E firm is going to migrate to automated timesheets. The missing pieces are now in place…nearly everyone working in the A/E environment is computer literate, and everyone at most A/E firms has access to a computer.

The timesheet automation works if there are checks and balances within the system. Automated systems will typically prohibit employees from charging to a project that has not been set up in the accounting system. Many A/E firms carry this a step further; employees cannot key time to a work code unless there was a budget established for the respective work code for the specific project.

Some of the other attractive features include:

  • “Pop-up” screens that provide specific project information. This option contributes immensely to timesheet accuracy.
  • Daily timesheets…yes, some firms are already updating timesheets on a daily basis.
  • Self-prompting features, reminding employees to record their time.
  • Integration into a firm’s internal and external e-mail systems.

Firms that have invested in timesheet automation software typically claim the investment payback period is months instead of years. Automating timesheets is usually a natural progression for an A/E firm.

Client Billings

Timesheets are the basis for almost all client billings. Therefore, if timesheets are processed on time and correctly, then the client billing function tends to proceed with fewer glitches. The other foundational elements of a successful billing system are the contract negotiations with the client and the project set up within the job cost system.

Contract negotiations establish the basis for a successful relationship with the client. If there is a clear delineation of the scope of the services to be provided and the compensation for these services, then the likelihood of a successful engagement is very good. A clear scope of services will assist both parties in understanding the justification for contract change orders.

Contract negotiations should also address retainer requirements and payment terms. Credit and reference checks are always appropriate for new clients. More and more A/E firms are requiring retainers from new and also slow-paying clients. Also, retainers are routinely applied to the final invoice, and not the initial invoice. More A/E firms involved in short-term projects are delivering their product on a C.O.D. basis. This is especially common with firms offering surveying services. Such payment issues must be addressed up front with the client before any services are performed.

Setting up the new project accurately is the other foundational element of a successful billing system. There should be a signed agreement, a budget, and a project set-up sheet with the appropriate client and billing information. Most firms have a policy of not performing services without some kind of a written and signed agreement.

The Billing Attitude

Some A/E firms are able to process all of their client billings in seven working days or less. Those firms have a sense of urgency to get the billing cycle over quickly. Other firms tend to view the client billing function as a low priority function. The attitude tends to be, “I will get to it later, I have more important things to do.” Another measure of billing attitude is how quickly work-in-process is converted into accounts receivable. If there are project amounts that are slow to move out of work-in-process, the likelihood of collections is usually poor.

The following is a basic rule in the business world; it should not be a surprise to anyone in the industry:

The closer the invoice is presented for payment to the time the services were performed, the more likely it will be paid.

A/E firms that bill their clients on a more timely basis typically have less of a problem with collections. Therefore, another fine new year’s resolution is to process client billings on a more timely basis.

Gauging Collection Efforts

Most firms judge their collection efforts by comparing the average collection period of their Accounts Receivables. The accounts receivable days outstanding formula is the following:

Take the annual sales or revenue for the firm and divide by 365. This gives you the “average daily sales”. Take the Accounts Receivable balance and divide by the “average sales per day”. The result is the number of days of sales in Accounts Receivables.

There can be a tremendous variation in collection periods among A/E firms. Some A/E firms have a collection period of over 100 days, while other firms providing the same type of work with similar clients have a collection period of under 60 days.

A/E firms must set their own collection standards, rather than use industry surveys with “averages” as a standard. If invoice payments are due 30 days after receipt, then a reasonable collection period is probably in the 45 to 60 day range. More and more firms are placing “stop work” orders on clients who have not paid within 60 days of the invoice date.

Some firms are rating clients according to how they pay. Fast paying clients receive preferential treatment, especially with rush jobs. Slow paying clients may have their work “bumped” for project work from prompt paying clients. Yes, there are some firms that believe that they must keep accepting new projects from a “deadbeat” client or the client will not pay for current projects. However, in almost every case, the A/E firm would be better off if the deadbeat client was cut-off.

The key to any collection program is to have no surprises. Up front, the client must be informed of payment terms and conditions. On larger projects, someone from the administrative staff should be involved to review with the client their bill format requirements, the preferred delivery time of the invoice, payment terms, and company policies regarding late payments. Some A/E firms like to take the project manager out of that particular communication loop; others prefer to have the project manger intimately involved. Either way, the management team, project managers, and administrative staff must all buy-in to the process.

The differences between the firms that have short collection periods and those with long ones are fairly simple:

  • Firms with short collection periods have good time and billing systems.
  • They negotiate reasonable contracts, with retainers required when contracting with questionable clients.
  • They are good at collecting…they make collection calls and enforce their contractual rights.

Collections Activities

A/E firms that have their collection activities in order almost always have project management involvement when there is a collection problem. Usually the financial manager and the project manager work closely in the collection activities. The financial manager typically oversees the whole collections effort where the project manager is intimately involved with their particular projects.

The formula that works for every A/E firm is that there is quick action on delinquent accounts. Most firms with a short collection cycle do not wait until the account is 60 days old before making a collection call. A call is typically made at 45 days. Yes, we have all heard the comment, “If we called that soon, we would be on the phone constantly. And besides, all we would do is tick the client off.”

It will take a sizable time commitment during the first two or three months when such a program is instituted. However, the time commitment will decrease over time…and the collection period and the amount of bad debts will also decrease. A good collections system pays for itself many times over.

Collection efforts are always made from “peer to peer”. The billing clerk making collection calls contacts the clerk in the client’s Accounts Payable Department, not the company president. Likewise when owner/managers of an A/E firm make collection calls, they contact the client owner/managers.

Collection Goals

One financial manager gave his billing clerk a goal of collecting one million dollars during the month. The manager thought it was a little high being that the most the company had ever collected in a single month was just over $800 thousand. The billing clerk took the goal as a challenge. She made calls and arrangements to pick up checks. She creatively used her lunch hour to deliver invoices and pick up checks. Well, she made her goal with $50 thousand to spare. However, she didn’t stop. The second month she collected an additional one million dollars! The average collection period for the company dropped by over twenty days! The third month she collected $400 thousand…there was literally nothing left to collect.

Yes, it is possible to accelerate collections almost overnight. However, most firms tend to favor a series of goals for improving the average collection period. The key is to establish goals and then a program to achieve the goals. A third fine new year’s resolution is to reduce the average collection period by ten maybe twenty or more days!

In Summary

Employee timesheets, client billings and collections are the “nuts and bolts” type functions of A/E firms. These functions are the basic administrative requirements for a successful professional practice. The more profitable firms tend to be able to routinize these basic functions and spend more time on client matters. More firms are using technology such as automated timesheet entry to gain efficiencies and assist the professional to be more productive. Discipline combined with adequate tracking systems and management “know-how” are the keys to a more profitable A/E firm.

Here’s to a prosperous New Year!

John B. Pruitt, CPA, isPresident of A/E Consulting Services, Inc. He has worked with over 200 A/E firms in developing financial, strategic, and ownership transition plans. Mr. Pruitt may be contacted at A/E Consulting Services, Inc., 1623 Second Street, Kirkland, WA 98003, call (425) 827-2995 or e-mail: a_e_consulting@msn.com.

 

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