of billing arrangement, you should be able to accelerate your cash flow significantly while reducing total credit exposure.

Collect A/R in a timely manner. Dedicate resources, including senior management attention, to collect all receivables within 30 days of the invoice date, with significant managerial attention on any item over 60 days past due. Inclusion of late payment charges (e.g., interest) in contracts and invoices also may be helpful in accelerating payment.

Prebill. As described earlier, in certain situations you may be able to negotiate terms with your clients to bill them based on an estimate of the actual costs incurred, particularly when the project is large or you will be procuring a significant amount of goods or services on their behalf.

Negotiate 45- to 60-day payment terms with vendors. When establishing a relationship with a vendor, particularly if it is one that will be long term, try to negotiate terms that provide for payment within 60 days, but no less than 45 days, unless the vendor is willing to grant discounts for prompt payment. Most vendors will be delighted to work with customers who always pay their bills within 45 days without falling behind. Although the negotiations upfront are difficult, once the vendor agrees to it and you always make your payments on time, it will be a win/win situation for both parties. However, if you negotiate delayed payment terms and then fail to make payment within that period, your firms credibility will be damaged and your ability to negotiate similar deals in the future will be impaired significantly. When asking for this concession, you must follow through and live up to your word.

Budgeting/Financial Planning

If you dont know where you are going, any road can take you there.

-Lewis Carroll,Alice in Wonderland

Financial planning is an art that combines historical facts with subjective assessments of future events to project the firms financial performance in both the current fiscal year and in succeeding years. These future events could include winning new business, growing existing accounts, losing accounts/clients/projects, adjusting for staff compensation changes, as well as changes to all other cost components. The key in developing a forecast is to understand all assumptions, assess their probability of occurring, and quantify them in the form of both a high level long-range plan as well as a detailed annual operating budget. The remainder of this section addresses key planning process methodologies and issues.

Long-Range Planning. Long-range planning is the process of setting forth certain goals and objectives for the firm to achieve over a specific

period of time. Having a written plan enables management to unite behind a single set of objectives and provides a benchmark against which their performance can be measured. Every firm should have a long-range plan, regardless of size that meets the strategic or personal objectives of the owners. Managers of professional services firms are often so preoccupied with the state of their relationship with their current client base that they believe any sort of planning beyond the current quarter is meaningless and a waste of time. Often it is. However, smart managers acknowledge this paradox but still press forward in establishing goals for the firm.

Long-range plans (LRPs) may be developed for any period of time, normally for a minimum of 3 years, often 5, and sometimes 10 years. Obviously, the longer the term, the less reliable the plan will be, but any of these terms is useful in quantifying the goals of the senior leadership team. The key to the development of any plan is to quantify and document realistic targets for the firm, as well as the strategies the firm will employ to achieve its goals. By quantifying these goals and strategies in the form of projected financial statements, the firm will also quantify the order of magnitude of its cash requirements for working capital in future periods and thus can take action to secure that funding with as much lead time as possible with the best terms available. Once developed, the LRP should be updated each year as the initial step in the development of the annual budget. At a minimum, a well-developed LRP will include:

Executive summary (outlining in narrative form the major issues facing the firm and its prospects for the future, the firms goals, and its strategies for achieving those goals)

Projected income statements (The LRP should be formatted in a way that maps exactly to the financial statements of the firm to facilitate reporting against the plan as well as provide a consistent foundation for historical trend analysis.)

Projected balance sheets and cash flow statements Key metrics, such as:

-Gross margins percentage

-Revenue per employee

-Operating margin percentage

-Net income as a percentage of revenue

-Staff cost as a percentage of revenue

-Compound annual growth rate (CAGR) of revenue

-CAGR for operating expenses, operating margin, and net income

-Revenue conversion rate (change in revenue/change in operating margin) for each year

-Current ratio

-Debt to equity ratio

-Return on equity -Return on assets Capital plan (outlining key capital needs required to support the plan, including the type and quantity of equipment needed and cost for new initiatives, as well as the long-range replacement plan for existing equipment)

Annual Planning/Budgeting. Once the LRP has been developed and approved, targets for the upcoming years budget will result and, most importantly, they will have been developed in the context of long-range targets for the firm. Without achievement of the LRPs first-year targets, it is unlikely the firm will be able to achieve its long-term goals. But once those goals have been established at a high level, the firm can then prepare its detailed annual budget for the upcoming fiscal year.

Some firms prefer to avoid using the word budget because many managers assume that they can, and should, spend everything in their budget even though it may not be necessary, thus leading to higher expenses than absolutely needed. Instead, words such as annual plan, forecast, outlook, first update, or latest update may be used interchangeably to describe the firms financial plan or budget for the upcoming or current fiscal year. Which term to use is a matter of managements personal preference, but they should recognize that most nonfinancial managers still will refer to the annual plan as their budget, no matter what the firm calls it officially. The remainder of this chapter refers to the detailed annual plan as the budget.

When establishing budgets to which line managers will be held responsible, it is critical that those managers participate actively in the development of their departments detailed plans. If they do not actively participate in the process, the numbers they are given may be referred to as the CFOs numbers, and it is less likely that the manager will buy into the numbers and ensure that his or her costs are managed accordingly. Situations where budget numbers are given to managers as their plan are often referred to as top-down budgeting. The best attribute of top-down budgeting is that the numbers for each department will add up to be consistent with the LRP for the firm. However, line managers are unlikely to buy into numbers they did not create, and, in many cases, those top-down plans will not reflect the line managers knowledge of exactly what it will take to run his or her team- erring on the low side could endanger client relationships and the quality of work produced, while erring on the high side will result in unnecessarily high expenses.

Bottoms up budgeting is just the opposite of top-down budgeting. Line managers prepare budgets that they believe they need in order to achieve their objectives and then submit them to the finance department to consolidate. Without guidance from above, it is unlikely this first set of budgets will aggregate to numbers anywhere close to the LRP requirement for the firm. Once those initial drafts are submitted, it then may require an extraordinary amount of work to tailor them back to a level that the firm can