Adfin | The path to Double Zero and why it matters

We’ve written this with smaller professional services firms in mind (<£5M). We’ll be following this with an edition for larger firms soon, as while the goal is broadly the same, there are nuances.

Every business is different. But one of the things that has surprised us most at Adfin is just how differently professional services businesses approach cashflow.

Some of the businesses we meet are extremely strict: no payment, no work. They bill in advance, via subscription, and if the money doesn’t arrive the work stops.

Others quite frankly blow our minds: for example, the large-ish professional services firm routinely using a bank credit line to make payroll despite carrying a debtors’ book twice the size of the payroll itself.

Or the PE-backed lawyer acquiring practices with external investment, despite the cash they have locked up in WIP (work in progress) being sufficient to fund 4 typical acquisitions outright.

So what’s going on? Why do some businesses carry significant debtors, or so much WIP? Is this a problem: should all firms be aspiring to what we’ll call the Double Zero of 0 debt and 0 WIP?

Let’s dig into it.

Where things go wrong

We conducted an unofficial survey of businesses not making Double Zero and found there were 3 main reasons:

Visibility, or lack thereof

Let’s get the easy one out of the way first. Some firms just haven’t got the systems and controls to know what’s going on.

They might be growing quickly via acquisition and not yet joined the dots.

Or they might be a more traditional firm working “the way we always have”. They might not have reporting in place on the size of their debtors' book, or how much cash is locked up in WIP. For firms with messy, legacy systems often the first challenge is just getting visibility across the whole firm.

Time-money tradeoffs

Collecting money, for all of human history until 2026, followed a law of diminishing marginal returns. Your best payers pay with zero effort. Your worst require significant human input to extract the fees owed.

It is perfectly rational in that situation to draw a line at the point where the marginal cost of chasing the debt exceeds the value of the debt itself.

For example:

You are in a dispute with a client. You could escalate it to legal action, but the effort and costs involved are not worth it. So you write it off.
You’ve got your clients set up on standing orders but then you change your fees. You need to tell all your clients to update their standing orders and until they do, your debtors' book grows. For some, you just give up chasing and accept lower fees.
You’ve done the right thing and started using direct debits, but a sizeable number fail (5-10% is not abnormal). The manual work to follow up on the failed payments and if necessary offer alternative payment links gets pushed back and forgotten.
You’ve got a set of clients who refuse to adopt direct debit and want to make bank transfers each month. You let them, but they inevitably pay late, require chasing, and someone still needs to check the bank statement each day to see if they’ve paid. The person doing this goes on holiday, things fall between the cracks, and the aging debt list grows.

None of this is necessarily bad, given the traditional time-money tradeoff. But it does mean the firm won’t be able to achieve the holy grail of zero debtors.

Ways of working

To have zero WIP requires a fundamental mind-shift in how you think about your business. Zero WIP means you need to have zero time invested that hasn’t been recovered yet. Or even better: negative WIP means you need your client paying you in advance.

This requires rethinking how your firm operates. Some common reasons we hear for why businesses think zero WIP is impossible are:

Seasonality. If you are billing £500 a month but in month 12 you do £5,000 of work to file a tax return, your WIP will be negative all year until the final month. To this, we would say move to productising your services: move from selling hours to selling a product. A product is either “not started”, “in progress”, or “done”. There is no cost of time in between.
Tracking. Some firms use WIP as a way of tracking performance: a struggling team member could be identified by a growing WIP balance. But we would argue tracking performance is better done by managers with a 360 degree view than simply as a function of hours spent.
Your own processes. Jim might have done the work, but Sally hasn’t reviewed it yet. Or Client Clive hasn’t sent data you need to finish the job. Or maybe you haven’t been clear with Client Clive up front on the information required to do the job in the first place. These processes are within your control to improve so that you are always on the front foot.

Fundamentally, moving to zero (or negative) WIP is about making a shift in thinking about your business from hours to outcomes. Price for the outcome, and bill up front.

Why Double Zero matters

At this point, you might be thinking: why this obsession? Making these changes will be disruptive and might upset my clients. It will take a lot of work and my firm is running just fine as it is.

There are 4 important reasons why this matters:

Client experience. Working with this mindset results in a better client experience. If you set expectations clearly up front and outline your fees in advance you build trust (you are the expert here, after all) and also ensure the project will run more smoothly.
Cashflow. Very obviously, achieving zero means your cash conversion cycle is zero days. That means you are using your clients’ money to fund your growth vs someone else’s. You might have the best bank credit line in the business, but it won’t be as cheap as this.
Profitability. If you are carrying zero WIP, you have perfectly productised your services. There are no nasty surprises when you realise you’ve been building up unprofitable work.
Higher valuation. If you want to sell your practice, Double Zero is highly attractive. The business is self-funding, revenue is recurring and guaranteed, and your systems are working nicely. From our research and conversations with typical buyers, this takes a small professional services firm from 0.8x-1.1x multiples of gross fees into 1.2x-1.5x+ multiples.

So you want to add as much 50% to the valuation of your business? Let’s review how.

The path to Double Zero

The steps are simple:

Move to selling products based on outcomes, not hours
Start billing in advance, by subscription (direct debit)
Adopt the latest tech and tools to make (1) and (2) easy.

Firms are often nervous about making these changes. They worry about losing clients, or the systems and tools required to make it all work. All we can say is that the fastest-growing and best professional services firms we are fortunate to work with here at Adfin operate in this way. It improves the client experience and makes your business better, freeing up cash to invest in growth. Can you really afford to not do this?

To examine point (3) in more detail, it’s all about having the right tools for the job.

With modern proposal software like Socket, managing products and pricing and issuing proposals is straightforward. The client experience is much better: they get a professional, slick proposal with all the information clearly laid out. And of course, this makes them much more likely to sign up.

Socket integrates seamlessly with Adfin for payment collection. Adfin is harnessing AI to automate for you the manual, tedious work that used to make chasing debt too expensive to bother. It also offers the UK’s most modern direct debit platform to help you collect payment automatically each month, and automates away problems like chasing failed payments.

Adfin handles communications via email, whatsapp and SMS and brings card payments, bank transfers, and direct debits into one streamlined platform for the first time. Our new Resolve product helps you manage client issues seamlessly and quickly. And we integrate seamlessly with leading accounting software.

And the results are clear: 65% of UK SMB invoices are paid late. For Adfin customers, that figure averages just 9%. And we won’t rest until it’s 0%.

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Want to learn more? Contact our friendly team for a demo!

The path to Double Zero and why it matters

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