Collections - The Lifeblood of a Firm
What are the top priorities for any law firm? First, it must represent its clients in the most competent, professional manner possible. Second, it must strictly adhere to the ethics of the profession, as set forth by the North Carolina State Bar in the Rules of Professional Conduct. These two guiding principles go beyond running a firm and focus on the spirit of being a lawyer who represents both the client and the public trust.
So what is the next priority on the list? Well, you are running a business, so it should be collections. Collections are the lifeblood of any law practice - big or small. Your firm will not survive long unless it can collect the money it is owed in a timely fashion.
In today's economic environment, a law firm needs to pay more attention to its receivable balances. In general, your clients face more financial stress now than they have in the past eighty years. Their problems often have a direct impact on their ability to pay your invoices. Even if your firm sees a rise in the amount of billable hours, this may not translate into more money in your firm's bank account. Doing more work is really only a good thing if you can collect the fees associated with that increased workload.
Here are six steps that your firm can utilize to help increase your collection rate and decrease your aged receivables balance.
- Invoice More Frequently: The common practice among law firms is to invoice at the end of each month. Often, the invoicing process gets drawn out longer than that because attorneys are notorious for despising the administrative nuisance of recording time and reviewing pre-bills. This can create a significant lag between the time that work is performed and the time when the client receives the invoice for that work. When there are delays between performing work and invoicing the client, cash flow problems arise. Obviously, your firm continues to pay its staff. Unfortunately, your firm has to wait until your clients pay to offset those payroll costs. Another issue is the approval process your client conducts. If you can generate invoices while the work you did is fresh in your client's mind, it increases the likelihood that your client will remember and appreciate the work you did for them. That, in turn, leads to a higher likelihood that your client will pay the amount you invoiced to them.
- Retainer, Retainer, Retainer: The best method to avoid collection issues is to obtain a retainer from your client. Retainers act as a safety net against future collection issues. Retainers provide great assurance that you will get paid for all the long hours and hard work you put into representing your client.
- Ease of Payment: Make it as easy as possible for your clients to pay you by implementing various payment options like an internet payment service such as PayPal, credit cards, wire transfers, checks, and, of course, cash. Try to remove barriers on any types of payment your firm will accept. Accommodate your clients' preferences. Money is fungible, and it all goes into your bank account the same way. A common refrain to why you might not want to accept PayPal or credit card payments is that there are service fees incurred with these options. Food for thought: would you rather collect 98% of the amount owed to you or 0%?
- Assign Ownership: Assigning someone at your firm responsibility for collecting outstanding receivables allows for greater accountability over this critical task. Collecting an outstanding receivable is not the fun part of practicing law. Nonetheless, it is very necessary for running a law firm. Your firm can assign one person to each client (typically the primary attorney for the client) who has ultimate responsibility on collecting any outstanding invoices. This puts accountability in the forefront. How often does a partner make a blanket statement of "why hasn't Client X paid their three month old invoice" and everyone stares off dumbfounded on how to respond. If you have assigned responsibility to one of your partners, you can, instead, say: "partner, why haven't you collected from Client X?"
- Make Regular Contact: One of the best ways to ensure good collections is by having regular contact with your clients. You need not harass your client (in fact, I discourage this approach). Instead, try talking with your client to better understand their situation. You sent them an invoice. You have sent them several invoices. They know that you did the work for them. It is not insulting to discuss your invoice with your client in a calm and professional manner. They can tell you the reasons why they are not paying you - maybe it is something simple like a misplaced invoice and they need another copy or there could be long-term, significant issues that preclude your client from paying in a timely manner. If so, then that may lead to the next step: Taking Action.
- Taking Action: The final step in the collections process is to take proactive steps towards collecting an outstanding receivable. Hopefully, this step is only performed after significant communication has taken place internally at the firm and between you and your client. Examples of taking action could be putting a client on a payment plan or, as a last resort, taking legal action. As a lawyer, you know how speculative litigation can be. It is often a better idea to work with a client and formulate a long-term solution for payment. In any event, that is something that you will need to weigh as you try and collect the money you are owed. As with all of the steps above, it is better to take action sooner rather than later.
Tom is the Founder and President of Boyle CPA, PLLC and Boyle Recruiting, LLC. Boyle CPA provides accounting and consulting services to small and mid-sized business with a focus on law firms. Boyle Recruiting performs recruiting services for all positions in the legal industry. Visit www.boyle-cpa.com and www.boylerecruiting.com for more information.
About the Author
Tom Boyle is Co-Founder of TrustBooks, web-based software for managing trust activity in compliance with state bar requirements. TrustBooks is simple and intuitive, so trust accounting isn’t intimidating. Prior to TrustBooks, Tom owned Boyle CPA, a CPA firm that provided accounting and consulting services to small businesses with a focus on law firms. TrustBooks offers a 30 day free trial at www.trustbooks.com.Read More by Tom >