What Is A Good – Not Average – Benchmark For Age of A/R?

Seems like a simple question, but the results were surprisingly tricky to analyze.  We analyzed 86 firms from the 2010 Rosenberg MAP Survey (425 participants overall) in our survey with annual fees of $6-10M.

Short answer:  All 86 firms averaged 2.4 months of A/R:

• 42% of the firms had A/R under 2.0 months of age
• 39% had A/R from 2-3 months
• 19% had A/R over 3 months.

If criteria were set for getting a grade of “A” in A/R, it would be in the 1.5 month range.  But here is where it gets confusing:

• Firms with income per partner (IPP) over $500K (15 of the 86 firms) had an average A/R of 2.8 months.
• The other 71 firms with IPP below $500K, were in the 2.1 to 2.4 range.

So what does this tell us?  That the most profitable firms performed WORSE than less profitable firms in collecting A/R?  This doesn’t seem right.  My interpretation would be this:  The more profitable firms have higher fees, larger clients and because they make so much money, cash flow is bountiful, which causes them to be somewhat lax in collecting receivables.  Also, they probably have several large clients that are very profitable to the firm, but pay slowly.

The less profitable firms have tighter cash flow and hence, focus more on collections because they really need the cash to pay the partners and to pay the bills.

It should be pointed out that the 17 firms with IPP over $500K performed well in other related areas:

• The 17 most profitable firms had realization of 88.6% and age of WIP at 0.9 months.
• The other 71 firms had realization of 84% and WIP of 1.1 months.

The above data suggests that there is a stronger correlation to IPP in the areas of realization and billing WIP promptly, than in collecting receivables.

So, does all this analysis suggest that it’s not important for firms to collect their receivables promptly?  Absolutely not.  It simply suggests that there are other related areas that have a higher correlation to profitability.