Accounting Industry Billing Models: Selecting a Fixed Price Agreement method

This article is an extract from the book 'Everything you need to know about Xero Practice Manager'
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For fixed-price agreements, we have an agreed fixed fee with our client, to be billed over a 12‑month period. We set up a repeating invoice in Xero, and map this revenue to a job within Xero Practice Manager (XPM). How we practically do this is covered in detail in Chapter 7: Setting up Engagements. At the moment, we are just looking at the overall concept.

There are three possible ways to set up these agreements:

• In-advance
• Contract-period
• In-period.

In-advance is when we bill for the annual accounts work a year in advance. So we are collecting the full 12-month installments before we start working on the annual accounts. This is the best method for cash flow, but the most difficult to onboard new clients due to the higher up-front fees involved.

Contract-period is where we have contract renewal dates that do not have any alignment with the client’s financial year. It is much easier for onboarding new clients, but can require a bit more administration.

In-period is where we bill for the annual accounts work over the 12 months. It is the worst option for cash flow, but the easiest way to onboard new clients.

Each method has its upsides and downsides.

The in-advance method is the best for cash flow, but it can be difficult to onboard new clients due to the higher up-front fees.

The contract-period method is a good middle ground. It is easier to onboard new clients, but doesn’t mean you are bankrolling your customers for up to 12 months like with the in-period method. It is also great for cash flow because you are being paid in advance. The downside to this method is you are managing rollovers throughout the year, rather than a bulk rollover at the end of each financial year. This can quickly become a huge administrative burden.

The in-period method is the easiest way to onboard clients, but it does mean you are up to a year behind in your cash flow. If you bring on a lot of new clients quickly, you are likely to be trading from an overdraft because you have to pay wages now, but you are getting paid over the 12 months. It also presents the risk that you could do the work, then the client leaves you and does not pay the final installments.

The key is to choose a method and stick with it. Jumping between methods and not having clarity when onboarding new clients is the fastest way to create an administration mess. In-advance makes it more difficult for onboarding, but is excellent for cash flow. Contract-period is a good middle ground, but administratively taxing. In-period allows you to quickly onboard new clients, but you may need an overdraft to fund the growth.

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