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How small CPA firms manage their cash.

The managing partners all keep a tight rein on receivables but use different strategies to conserve cash.

CPAs recognize the inherent truth of the old saying, "Profits are an opinion, but cash is a fact." They routinely point out to clients the indisputable fact that cash flow is the lifeblood of any business enterprise and that effective cash management is essential to a company's success. CPAs also realize that cash flow is manageable in most cases. Generally, they can recommend to management a number of steps to alleviate or eliminate periodic cash emergencies, even if such emergencies are common to the industry or have cropped up regularly in the past.

Ironically, many small CPA practitioners don't pay sufficient attention to their own firms' cash flows. Citing workload compression or a cyclical slowdown in revenue growth, many managers of small CPA firms argue cash flow imbalances are inevitable, with midyear cash surpluses followed by negative cash flows near yearend. However, despite the profession's common problems, some firms have found ways to satisfy the chief aim of a cash management strategy - ensuring that sufficient cash is available to meet the firm's needs and objectives as they arise. In recent interviews with the Journal, managing partners of four small CPA firms discussed the most important elements of their cash management strategies.



Lucy Carter is the managing partner of Carter, Young, Wolf and Dalhauser, P.C., in Nashville, a firm with five partners and 11 professionals that derives 60% of its revenues from the health care industry. Although the economy in the Nashville area was stable, at best, revenues for Carter's firm rose by 7% in 1992, reflecting the growth of its health care clients.

Carter's principal tool for keeping cash flow on an even keel is a formal budget. She said, "I don't know how small CPA firms can survive without a budget in this business climate." Her firm budgets for revenues and expenses at the end of each year for the next calendar year. The revenue budget is derived from chargeable hour goals set by the staff, with a threshold of 1,800 chargeable hours for each staff member and 1,700 for each manager. These goals are compared with the firm's revenue base for the current year and adjustments are made for clients added and lost. The revenue budget is then used to budget expenses for the coming year.

Once the formal budget is prepared, it is broken down into months. Each month, the budget is compared with the firm's actual financial statements. If the financial statements fall short of the budget, adjustments are sometimes necessary. In an effort to keep costs in line, the firm last year reduced its staff by three staff accountants and added a part-time CPA staff accountant. Carter said the 1992 staff reductions were a response to budget shortfalls.

In addition to the budget, Carter credited an aggressive credit and collection policy for her firm's ability to manage its cash flow. She said, "We're extremely tight on billings and collections. We bill twice each month. Clients get a phone call if a bill isn't paid in 30 days and we have a stop-work policy for clients with bills over 90 days old. Most important, we are up front about letting clients know we cannot afford to work for nothing."

In order to keep current on billings, Carter's staff prepares daily production reports with month-to-date and year-to-date columns as well as comparisons to budgeted production levels. She said, "If you want to keep your production and billings on target, you must know what they are during the month. You cannot wait until the end of the month for a production report."



Gary Nelson is the former managing partner of Nelson, Harrigan, Fladwood & Co., a seven-partner CPA firm in Bend, Oregon, that has taken an unusual approach to managing its cash flow.

Nelson said until four years ago, his firm operated on the principle that if the firm generated income, cash flow would result. However, with the slowdown in local business activity, the partners realized revenue growth would not automatically generate sufficient cash flow and decided to take a more prudent approach to expenditures.

The major change in the partners' approach was their decision to internally capitalize the firm. Nelson said, "Until 1991, our firm maintained a revolving credit line, as do most CPA firms in this country. Our firm's cash flow turns positive in February and stays that way until July, when it tapers off. During the slower months from July through December, we usually have to tap our credit line to keep operations on an even keel. In December 1991, we had used $140,000 of a $150,000 bank credit line. By December of 1992, however, we had whittled that down to $5,000 and expect to reduce the debt to zero next year."

When asked for the secret to internal financing, Nelson unhesitatingly answered, "It's getting all your partners to buy into it. If just the managing partner does, the others may go overboard on their travel and entertainment budgets or their client development budgets. However, if it's a group effort involving all of the partners, it becomes much easier."

Nelson added that even after the commitment was made, the practical problem of cutting expenses remained. His firm found considerable room for expense reduction in a number of areas. By conducting group self-study continuing professional education programs internally for the firm's 25 professionals, the firm was able to pare an estimated $20,000 to $25,000 per year from its CPE conference and seminar budget. Eliminating redundant subscriptions in the firm's library saved another $25,000. In addition, a cafeteria plan was implemented to reduce the firm's Social Security expenses and control employee benefit costs. Also, duplicate software systems were pared, saving software licensing costs.

However, the most important element of the plan was a significant reduction in the firm's accounts receivable. Nelson said, "CPAs often continue to offer services to clients with outstanding bills as much as nine months old. In our firm's case, we had $160,000 in receivables over 90 days old when we decided to implement a strict accounts receivable management policy. We were able to reduce the $160,000 in receivables to nearly $60,000 by following these simple steps. Clients get a series of automatic collection messages starting after 45 days and are referred to a collection agency after 135 days. No work can be done for a client over 90 days delinquent without managing partner approval."


Greg Lurie is the sole proprietor of Lurie & Co., a firm with seven CPAs located in Albany, New York. Lurie creates an annual budget for his firm. "Like most accountants, I tend to be overly pessimistic in my forecasts at the beginning of the year," he acknowledged. "In this economy, the pessimistic forecasts kept me conservative and, as a result, the firm did well."

In using ratios, Lurie considers the ratio of wages to billing his most important monthly indicator. To control expenses, he monitors wages to billing very closely. He said, "If you can keep that ratio in line, almost everything else will take care of itself."

On the revenue side, Lurie called accounts receivable management "the most important element in creating a positive cash flow for small CPA firms." Because it requires constant monitoring, he asks his staff to submit weekly time sheets and work-in-progress reports. He sends out monthly bills but keeps them objective by having another person involved in the billing. The bills are tabulated by computer, and the billing amounts are reviewed by Lurie and one other person. "That way," said Lurie, "we keep each other focused on the service we've provided and we're less likely to lower our bills unnecessarily." He also asks for advance payments from new clients.

When asked if he had problems with clients because of the recession, Lurie said, "This is a very difficult period for business in this area. I've had clients that were good for 18 years but suddenly went bad in the next 2. Still, because I have a personal relationship with most of my clients, I have had less trouble than most firms.

Lurie added, "This slow-growth economy will probably serve me well in the long run. I strongly support small- and medium-sized businesses and have aimed my practice at that segment of the market. As a result, I'm doing fairly well in this economy. You hear about the demise of the small CPA firm, but I just don't see it. I have client after client that wants the one-on-one relationship and intimate knowledge of its operations that only a small firm can provide."



Ron Stewart is managing partner of Stewart & Co., a limited-service CPA firm in Monroe, Louisiana. Stewart strongly believes CPAs should be entrepreneurs first and technicians second. "Unfortunately," he observed, "it's usually the other way around."

As the competition for available CPA clients heated up, Stewart sought to build cash flow by creating a special marketing niche for his firm. His firm concentrates on tax compliance, planning and consulting. He added the inscription "To accumulate and keep wealth for our clients" to his firm's business cards.

Niche marketing produces unique advantages for Stewart's firm. Earlier this year, be polled his clients and found the firm was regarded as a quality producer with fees on the high side. Stewart declared, "That's just where I want to be." To improve the firm's revenues, Stewart has been considering billing on a per-form basis rather than charging a set fee for each tax return. On such a basis, a minimum fee would be charged for the usual 1040 return, with additional fees added for each accompanying schedule. Stewart already has instituted a technology charge of $25 for each return to help pay for the software and hardware needed for processing. In addition, he has offered "audit insurance" to certain clients, which ensures the firm will respond to Internal Revenue Service inquiries and accompany the client to an audit. The audit insurance costs $50, or 10% of the normal fee.

In discussing his firm's credit and collection policies, Stewart said, "CPAs should create an environment that does not allow other people to abuse them financially." He began billing clients once per month and sending detailed monthly progress bills on work not yet completed for both individuals and businesses. Stewart was able to speed up the collection process by dating the bills the last day of the previous month and including a self-addressed envelope. If a bill is not paid within 30 days, Stewart's administrator calls the client. His firm requires a deposit or retainer from new clients and spells out the requirement in the engagement letter. "We have received 100% client acceptance on this point," he added. Above all, Stewart said, "The CPA and client should have a good understanding about payment going into the engagement, and they both should stand by that commitment later on."



Apart from mandating strict accounts receivable policies, the cash management strategies of the four small firms varied widely. While all were successful, each was tailored to the firm's size, individual practice niche or client base. Nevertheless, a number of the tactics mentioned could be used with equal success by many other small practitioners seeking to improve cash flow.


* SOME SMALL CPA FIRMS have found ways to ensure that sufficient cash is available to meet their needs and objectives despite the uncertain business climate.

* LUCY CARTER, managing partner of Carter, Young, Wolf and Dalhauser, P.C., in Nashville, uses a formal budget as her principal cash management tool. Her firm budgets annually for both revenues and expenses on a month-by-month basis. Each month, the budget is compared with the firm's actual financial statements and adjustments are made if necessary.

* GARY NELSON, managing partner of Nelson, Harrigan, Fladwood & Co., in Bend, Oregon, said his firm became internally capitalized to improve cash flow. By December 1992, it was able to pare a December 1991 balance of $140,000 on a $150,000 line of credit to $5,000.

* GREG LURIE, the sole proprietor of Lurie & Co. in Albany, New York, considers the ratio of wages to billing his most important expense indicator and relies on an effective credit and collections policy to maximize revenues.

* RON STEWART, managing partner of Stewart & Co., a limited-service CPA firm in Monroe, Louisiana, built cash flow by creating a special marketing niche for his firm in tax compliance, planning and consulting.

GENE R. BARRETT is a news editor on the Journal.

Mr. Barrett is an employee of the American Institute of CPAs and his views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.
COPYRIGHT 1993 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:Small Business: CPAs Can Help
Author:Barrett, Gene R.
Publication:Journal of Accountancy
Article Type:Cover Story
Date:Aug 1, 1993
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