Cash crisis and withheld fees at a growing QS firm
A 60-person quantity surveying firm has annual fee income of LKR 420 million and monthly payroll of LKR 4.1 million, due in nine days. Cash at bank is LKR 2.3 million; the overdraft is LKR 18 million at 18% per annum and the bank has not yet renewed the limit. Trade receivables are LKR 96 million, equal to 118 debtor days; work-in-progress not yet billed is 22% of annual revenue. One developer client is withholding LKR 7.4 million, alleging that a bill of quantities was issued 11 days late and caused a tender postponement. The contract has a fee cap, no interest on late payment, and an arbitration clause. Two other clients have asked for 30-day extensions. The partners want to pay a profit distribution of LKR 6 million this quarter.
1. Prepare a 13-week cash flow triage. Identify the immediate actions and the order in which to take them.
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The firm has a payroll gap before any other payment: LKR 2.3 million cash against LKR 4.1 million payroll in nine days. Add statutory payments and ordinary creditors, and the gap is larger than LKR 1.8 million.
Order of actions
- Same day: speak to the bank. Present a 13-week forecast and request renewal or a temporary increase of the overdraft. Do not wait for the payroll date.
- Days 1-3: stop the LKR 6 million distribution. Freeze discretionary spending, new hires and non-essential travel. Confirm which payments are legally priority: payroll, statutory deductions, and critical subcontractors.
- Days 2-5: run a debtor call campaign on the top ten receivables. Offer small discounts only where cash acceleration is certain; otherwise agree dated payment plans. Issue invoices for certified work-in-progress immediately.
- Days 3-7: negotiate 30-60 day extensions with the two clients, but only against written commitments. Ask key suppliers for matching terms.
- Weekly: maintain a rolling 13-week forecast, with a receipts-and-payments meeting every Monday. Report actual versus forecast to the partners.
The objective is not to collect all LKR 96 million; it is to close the next two payroll cycles without breaching covenants or losing key staff.
2. Advise on the LKR 7.4 million withheld fee and the proposed profit distribution. Include the contract and dispute-resolution position.
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Withheld fee. The fee cap limits the total fee; it does not automatically extinguish entitlement for work done. The absence of an interest clause means the firm cannot claim carrying costs, but it can still claim the principal. The arbitration clause means the firm should preserve the claim and avoid unilateral set-off or litigation in court without advice. The critical factual question is causation: did the 11-day delay actually cause the tender postponement and loss? Gather issue dates, transmittals, client instructions and the tender programme. Then propose a without-prejudice settlement: immediate payment of a stated percentage, with the balance paid over an agreed period or set off against future invoices, and a written reservation of rights. Arbitration should be a last resort because the amount may not justify the cost.
Profit distribution. The LKR 6 million distribution should not be paid now. The firm has a payroll gap, an unrenewed overdraft and a disputed receivable. Paying a distribution before ensuring solvency and bank compliance exposes the directors to criticism and may breach the overdraft terms. The partners should pass a resolution deferring distribution until the overdraft is renewed, debtor days fall below 90 and cash exceeds at least two months of payroll. If they still wish to distribute, it should be limited to the extent of undistributed profits after writing down the disputed receivable.