Getting started with client engagement letters in the UK

Client engagement refers to a variety of interactions between a professional service provider and their customers. Interactions can take the shape of email communications or an impromptu chat, Instagram posts or a formal contract – anything that constitutes communication, passive or direct. The formal contract component of this in an engagement letter is not only a great tool to manage the expectations of your client relationships, but as an accountant or bookkeeper they are likely a vital step in staying compliant.

This will depend on who your firm is registered with. Whilst you may personally be qualified with and a member of another body, the Institute or Association that your firm is a part of will set out guidance on best practice for engagement letters. Ordinarily, they do not mandate the use of engagement letters (other than for audits), but all recommend their use as best practice and provide templates of what should and shouldn't be included. And even if you are not registered with a professional body, it makes sense to have a standard engagement letter and terms of business, to act as your commercial contract between you and your clients.

Broadly speaking, you need to engage all of your clients. Whilst it might seem like you can do a bit of ad hoc work here and a favour for someone there without producing a formal engagement, you can open yourself up for all kinds of risks. Also, it is strongly recommended to engage each 'entity' that you are dealing with. So, if you are looking after a client who has a limited company, and her partner is also a director, you should engage 2x individuals and 1x business, separately. Whilst this might seem like an administrative nightmare, it really helps down the line if they fall out for any reason!

Again, there is no set guidelines on this, and I know in the past that I've been guilty of filing it and forgetting it! Most firms I know have great intentions, but their manual processes mean that letters are only updated when there are impending legislative changes, such as the laws around GDPR and Money Laundering. Commercially however, it makes sense to ensure that engagements are regularly reviewed, and I prefer to do this alongside fee reviews. This opens a perfect opportunity to speak to clients, assess the services that you are offering them, and to see if there are any other areas that you can help them with.

Your engagement letter should detail the services that you are expected to provide and how frequently you will provide them.

Whilst the engagement is a vital step in onboarding new clients, it is a process that should not be confined to the beginning of a relationship. To continue to build strong and transparent relationships you need to implement a system of regular re-engagement, with most accounting regulators and member bodies advocating for a minimum of annual reengagement.

A regular re-engagement process not only creates an opportunity for you to assess your current services and fees, it is an ideal opportunity to discuss with your clients changes in their business or situation which may require a need for different or additional ongoing services. It’s one more way that you can continue to build your client relationships and at the same time increase your service revenue and manage your scope.

In fact, it is nearly impossible to manage scope and mitigate scope creep if your engagements are not kept up to date and regularly reviewed. Without a process of re-engagement when services and client situations change, your baseline to determine if something is in scope, or out of scope, will be wrong. You will find yourself consistently undertaking work with both parties (yourself and your client) unsure if it is “included” in your current agreement or if there will be an extra cost, and potentially extra responsibilities. Whenever you undertake new work without a signed engagement you not only run the risk of not getting paid for unapproved works, but you create a situation where you and your clients' understanding of services can become misaligned potentially leading to a dispute.

The beauty of implementing a process of a minimum of annual re-engagements is the opportunity to review your pricing on at least an annual basis. A pricing review is more than undertaking a basis rollover of existing engagements. It occurs when a practice reviews the basis of their pricing in great detail. This process will include adjusting your pricing to reflect:

• Any changes in the cost of firm operations such as staffing, occupancy and general office expenses.

• Movements in the Consumer Price Index (CPI) which reflects overall costs of living

This process is relevant to all practices regardless of billing model. Both fixed fee and hourly rate firms should undertake this process to keep up with the global increases in the cost of delivering your services, ensuring ongoing profitability.

Accountants and bookkeepers understand that part of running any business includes cash flow management, however they often don't spend enough time doing this for their own business. Luckily Ignition and an effective engagement strategy can assist.

For service providers, a key item for healthy cash flow is keeping your debtor days as low as possible, and within terms. As an industry debtors have been difficult to manage historically and the 2020 Good Bad Ugly survey showed that average debtor days for accounting firms is 50 days. When most terms are between 7-14 days, this is not a good result.

Engagement Letters are the best way to both safeguard your position and cashflow without damaging client relationships, especially when combined with regular invoicing and taking control of payments.

Your Engagement Letter should include your regularity of invoicing. The more often you invoice and take payments the better, which is why monthly recurring billing arrangements are becoming more popular. If your clients are on a monthly fixed fee arrangement, you are only ever at risk for that one month’s work.

If you find you have underquoted a job, then you should also communicate this quickly with your clients, so there is no surprise if an invoice is higher than expected. Ensure there is a mechanism to do this in your engagement letter and you have the ability to vary the fee if during the engagement additional information comes to light or circumstances change. Surprise invoices often hang around longer in the debtor ledger, as clients were not prepared to pay for them.

If you provide your clients with a clear engagement and payment terms there are very few reasons why they cannot also provide their payments details. By implementing upfront payment, you’ll eliminate late payments – thereby increasing your cash flow.

The way you introduce this to your clients will differ depending on your billing practices. You can do this whether you invoice a set amount each month for all annual services or if you bill on task and job completion.

If you operate on a monthly recurring fees basis, it is simple to take control of your payments, as your client has already agreed to the pricing structure. By taking your clients’ payment details upfront and automatically processing their payments each month, you’ll ensure that your cash flow never suffers. Plus, you can also avoid the unpleasant situation of having to temporarily put a halt on work when your latest invoice hasn’t been paid.

Taking payment details upfront is a similarly useful strategy for clients who operate on a bill on completion basis, whether fixed fee or time billing. For fixed fees the process is quite simple as you have already agreed on a price. If you operate using time-based billing you can still do this. Simply provide your clients with a price range or an hourly rate, all of which can then be billed on completion once the work has been finalised.

You can also eliminate push back from your clients on this by implementing a policy of taking payment on the due date of the invoice as opposed to the date you raise the invoice. This will allow your clients to raise any questions that have between the job completion date and the due date of the invoice, which should keep everybody happy.

Find out more by reading our expert guide on 'How to take control of client relationships with engagement letters'.

The most successful client relationships are built on trust, open communication, and realistic expectation-setting. Understanding your client's needs, pain points, and objectives is key to determining the solution you can offer.

Further, keeping the feedback loop open indicates your commitment to improve and grow with them. Clients appreciate an openness to feedback and a willingness to learn and improve. Follow the steps mentioned above to build lasting relationships with your clients and to keep your professional services business thriving.

To that end, Ignition helps you create exceptional client experiences and foster win-win relationships. With features that facilitate proposals, billing, and client management, Ignition’s client engagement and commerce platform makes doing business a breeze. Start a free trial today.