Growing Fast but Feeling the Squeeze? Cash Flow Strategies for Professional Services

For professional services firms, a profitable year doesn’t necessarily mean a comfortable cash position. You might add clients and revenue and still feel stretched until you collect on what you’ve billed.

Much of your firm’s value lies in your people’s skills and work in progress (WIP), not in inventory or hard assets you can quickly sell or borrow against. When receivables outpace collections, rapid growth can leave you short on cash.

Fortunately, the gap is manageable, and financing is only one of your options. How you bill work, forecast ebbs and flows of deliverables, time your payments and size your credit all shape how smoothly growth translates into cash.

Why Growth Can Boost Your Profit But Not Your Cash

The most profitable months for professional services firms don’t always feel that way because cash arrives last. Your company gets busy with work, which turns into WIP — what you’ve delivered but haven’t invoiced. The invoice then sits in accounts receivable (AR) until you receive payment. But all the while, there are bills to pay.

Consider this example: A business sees its AR rise from $1 million to $4 million. That growth will translate into profit, but first, it must be funded. If the business collects in 60 days but pays employees, contractors and overhead expenses much quicker, that’s a gap to bridge now

In other words, growth is an opportunity to align your liquidity with today’s pipeline instead of last year’s revenue.

Where Does Cash Get Trapped Inside Your Firm?

Every professional services firm has value trapped in WIP and receivables, but the causes differ by industry. Here are some examples:

• Certified public accountants (CPAs) see their services concentrate in cyclical busy seasons, so WIP expands ahead of collections. 
• Marketing or advertising firms often front spending on vendors and media buys while awaiting client reimbursement.
• Architecture firms operate on progress billing across long project phases. Reimbursable expenses pay out before clients do.
• Law firms typically show billable time as WIP. Contingency work is unpredictable, and client funds are held separately, walled off from operating cash.

As a firm grows, having one or two dominant clients can further concentrate this risk — even one delayed invoice can create a cash flow crunch.

Are You Billing and Forecasting to Protect Cash Flow? 

Before you consider outside financing, look at the cash you’ve already earned. Much of it may be sitting in unbilled work or unsent invoices.

Billing promptly, invoicing on milestones and following up on aging receivables can free up more cash than adding a credit line. If billing remains slow, look at whether partners are submitting hours promptly. Also consider whether you invoice only at project completion, and whether invoicing by phase could improve cash availability.

Forecasting can help you anticipate when cash could run short. A rolling 13-week cash forecast can flag shortfalls in time for you to respond. Seasonal forecasting maps peaks and troughs, like a CPA firm’s busy season, so you can fund them in advance. Typical metrics to monitor include days sales outstanding (DSO), work in progress, utilization, backlog and realization.

What Financial Tools Support Your Working Capital Strategy?

After addressing billing and forecasting, the right treasury management tools can create flexibility as you grow. To design your company’s strategy, you and your banker may consider these approaches:

Reassess your timing on bill payments. Paying every bill the day it arrives can drain cash you may need elsewhere. Aligning payments with incoming collections can keep more cash on hand while still paying employees and suppliers on schedule.

Fund routine expenses strategically. Businesses can extend working-capital flexibility by adjusting how they fund operating expenses. A commercial credit card, for example, can add roughly a month of float on payables. Some card programs also return a share of spending as a rebate.

Put your deposits to work. If your firm carries meaningful balances, certain account structures — such as analyzed checking — can offset service fees with an earnings credit based on your balance.

Does Your Financing Structure Fit Your Growth?

When timing is your cash flow challenge, a revolving line of credit can help by letting you draw when receivables and WIP are high, then pay it down as clients settle up.

The first step is determining the size. If it’s based on last year’s revenue instead of this year’s growth, you might not have enough credit to manage a spike in receivables. Too big a line of credit, and you’re paying for capacity you don’t need. Work with your banker to pick a number that aligns with your pipeline, seasonal swings and your expected receivables.

Periodically evaluate your line of credit. It should scale up to cover payables while receivables build, and scale down as clients pay. If your line remains fully drawn, that’s worth a conversation with your banker.

Cash flow in a professional services firm is more a timing challenge than a profitability one — and timing can be planned for. Prompt billing, a rolling forecast and a line of credit sized to your pipeline work together, and paired with an integrated set of solutions, from credit and treasury services to cash management, they can help you move forward with confidence as your firm grows.