When one client owes most of a consultancy's debtors
What it means when one client makes up most of a consultancy's unpaid invoices, how it distorts the aging, and how to manage and forecast the risk.
By Achekam · · 5 min read · For Consulting businesses in South Africa, Nigeria, Kenya
A small consultancy often grows on the back of one anchor client: a bank, a state-owned enterprise, a multinational's regional office. The anchor client brings steady work and a name that wins the next pitch. It also, quietly, comes to dominate the list of unpaid invoices.
That is not a problem until the anchor client's payment run slips. Then a firm that looked comfortably profitable can find itself unable to pay salaries at month end, with most of its money sitting in one client's approval queue. This article looks at what that concentration does to the numbers, and how to manage it without losing the client.
How one client bends the age analysis
An age analysis is meant to show how healthy your debtors are. It sorts unpaid invoices by how long they have been outstanding, and most owners glance at the older columns to see whether collection is slipping.
AccountingTools cautions that when a large share of receivables comes from one customer, that customer's payment pattern can heavily distort the aging. Its guide to the aging schedule explains how the schedule is built, how it is read and how it feeds a cash forecast.
The distortion runs both ways. If the big client pays like clockwork, the totals look healthy even when a dozen smaller clients are drifting into arrears. If the big client is slow, the whole schedule looks alarming even though everyone else is paying on time. Either way, the headline total hides what is really happening.
Why one late payment becomes a cash problem
AccountingTools adds that a delayed payment from a major account may signal significant liquidity exposure. Investopedia makes a related point about working capital: a business can show positive working capital and still have a liquidity problem, for example when its current assets are entirely receivables and customers delay payment.
That fits a consultancy closely. There is no stock to sell and few other current assets. On paper, the balance sheet shows more owed to the firm than it owes to others. In practice, if the anchor client holds back one month's payment, salaries, rent and tax payments fall due regardless, and the firm has nothing else to draw on.
ACCA explains that the trade receivables balance depends on three things: the value of credit sales, the period of credit given, and how efficiently the business bills customers and collects overdue accounts. With one dominant client, the first two are largely set by that client's procurement terms. The third is where the firm has most control.
Read the aging twice: with and without the big client
In Achekam, receivables are aged into 0-30, 31-60, 61-90, 91-120 and over 120 days, with overdue totals. Use it twice each month:
- As it stands, to see the total exposure and how much of it is overdue.
- With the big client taken out, by subtracting its balance in each column, to see how the rest of the client base is paying.
Then ask two separate questions. Is the big client paying within its usual pattern? And are the other clients paying within terms? Mixing the answers is how small arrears hide behind one large, healthy account, or how a firm panics about collection when only one approver is on leave.
A simple worked example in words: the overdue total jumps sharply in one month. Taken out, the anchor client accounts for almost all of the jump, and everyone else is paying as usual. The response is a call to the anchor client's payables team, not a firm-wide crackdown on credit terms.
Statements and part payments on the large account
A large client may pay in batches, part-pay invoices under query, or pay one total against several invoices. If those payments are allocated loosely, the big account's aging becomes meaningless.
In Achekam, you record customer payments against one invoice or spread across the customer's invoices. A part payment leaves the invoice part-paid, and any extra is held on the customer's account. A receipt can be re-allocated later, and administrators can refund or reverse it. Allocate every payment to the invoices the client's remittance advice names, so the balance in each age column is real.
Each month, send the big client a statement. The server produces a customer statement of account as a PDF that can be e-mailed, and the screen says whether it was sent. A statement lets the client's payables team reconcile their records to yours. Differences surface as a query you can resolve, rather than as a silent hold on payment.
Agree a monthly call with the person in the client's finance team who can see where your invoices are. Ten minutes a month spent on the big account is time better spent than chasing every small one.
Building the big client's pattern into the cash forecast
AccountingTools notes that both the payables and receivables aging schedules can be used to compile a cash forecast. For a firm with one dominant client, the forecast should not assume that client pays on its terms. It should assume the client pays the way it actually has.
Look back at the last several payments from the anchor client: how long after invoice did each arrive, and were there months with no payment at all, such as over year end or during a system change? Use that pattern in the forecast, and then test a version where one expected payment arrives a month late. If that version shows the firm unable to meet payroll, the firm needs a buffer: an overdraft facility arranged in good times, a cash reserve, or a deliberate effort to grow other clients. A rolling 13-week cash forecast shows how to lay the forecast out.
When profit is strong but cash still keeps running short, profit but no cash covers the other common causes. This month, run the aging both ways and write down how many weeks the firm could operate if the anchor client paid nothing.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
