Closing the 'uncertainty gap'

Despite widespread discontent over the introduction of the new accounting rule for partnerships, Steve Gale says it represents a good opportunity for law firms to improve business processes

It is now a full 12 months since the Urgent Issues Task Force of the Accounting Standards Board issued Abstract 40, 'Revenue recognition and service contracts'.


In the intervening period, much has been written about its fairness or otherwise, the impact its application will have on the tax bills of professional firms, the successful campaign to allow for the spreading of those tax bills, and so on.


Finally, we seem to be entering a phase where UITF 40 and its impact has been accepted, albeit reluctantly, and firms are now concentrating their efforts on applying the principles and understanding the impact of the accounting.


What should not be overlooked, however, is the opportunity to use the introduction of UITF 40 as a catalyst for improving business processes, as this could help alleviate some of the difficulties that firms are anticipating. The overriding principle of UITF 40 is that a firm's revenue should reflect its activity in the year rather than the amount of fees that it has actually billed. For many firms, this is not an alien concept, as management information may well be based on the recoverable value of chargeable time that is booked by staff and partners.


It is now too late for firms to do anything to reduce the impact of the opening UITF 40 adjustment, that is to say, the position at the beginning of the financial year. UITF 40 applies to accounting periods ending on or after 22 June 2005, so those with accounting periods ending on, say, 30 April 2006, have to deal with the uplift at 1 May 2005. What is certain is that tax will have to be paid on that uplift; whether firms pay out the residue to partners will depend upon their own circumstances, including their cash resources.




Change your processes


So how can changes in business processes help soften the blow? There is the great mantra that 'cash is king'. The only truly certain profit is that made when the cash is received. Most of us perhaps regard profit as made when the fee note is issued, although there is always the risk of a client being either unable or unwilling to pay. Hitherto, most firms would not dream of paying profits out to partners just on the basis that they had carried out the work, although this is of course the measure that UITF 40 uses and is the basis now on which tax will be paid.


How then can firms close that 'uncertainty gap' - the gap between doing the work and ultimately receiving the cash?


It may be useful to approach this from the clients' point of view. Clients will gladly pay for good-quality advice received, especially when it is received promptly and, particularly, when it is received because of an urgent need. Accordingly, raising a bill immediately after the provision of advice is more likely to result in prompt and full payment than waiting for six months, when the client may not necessarily recall the specific advice and almost certainly not remember how urgent their need was at the time.




Prompt billing pays off


Regular and prompt billing will ensure the greatest chance of recovery of the value of work done. To achieve this, however, needs not only an adequate accounting system but the buy-in of all fee-earners, including partners. For many, this will mean a change in behaviour - for some, the change will need to be radical.


Clients normally react favourably to certainty. It should be possible for larger clients with significant matters to agree to monthly billing, either to an agreed schedule or to time incurred in that period. For smaller clients, a quarterly schedule may be more practicable. Although some might advocate an even longer period for certain clients, even annually, the earlier comments regarding clients' memories should be considered.


The process by which a bill can be raised is also important. The more cumbersome and time-consuming it is, the natural reaction will be to defer it as long as possible and then to issue one bill at the end of the process, where more regular billing would possibly increase the overall billing value and speed up cash flow.




Taking ownership


For fee-earners to be able to bill regularly, they will need to have complete and accurate information. Many time and billing systems allow input on a real-time basis, but many others allow the daily entry of time. At worst, the entry should be on a weekly basis.


Peer pressure may be needed to ensure that all fee-earners complete timesheets on time. In most firms, invariably it is the same small minority who are consistently late with timesheets. If strong management action is not taken, it can be difficult to prevent the failings of a few from becoming the accepted norm.


The final control for turning work done into cash is the credit control process. It is easy to think that getting the bill out is the final stage and one just waits for the cash to roll in.


Unfortunately, the real-life experience is somewhat different. Fee-earners need to take ownership of debts as much as they take ownership of the matter itself. The relationship with a client is a key part of ensuring bills are paid promptly. If fees are outstanding for more than three months, this can often be a warning that ultimate recovery might be in doubt and there should be a clear understanding of whose responsibility it is to chase the payment.


Steve Gale is an audit partner in the professional practices group at accountants Horwath Clark Whitehill