Curing Your Collections Headache
Establishing These Policies Today Can Help
Many law firms report that their biggest headache today is collecting money due from clients, especially in these tough times. As we all know, law firms do not live and die on billable hours. They survive on collections.
If your firm is having trouble with collections, you have plenty of company. Money is tight and most of us feel the pinch. While some law firms prosper, others both large and small have shrunk or even dissolved, not because of bad lawyering or lack of work, but because of cash-flow trouble.
Starting smart collections policies today and communicating them quickly to your clients, lawyers and staff will go a long way toward managing expectations and improving collections, keeping your firm afloat and even prospering through this economy’s bumpy ride.
Here are some simple steps to take to reduce or minimize your future collections headaches. We’ll start with policies and communications to establish with your clients, and then discuss how to make them an ingrained habit with your colleagues and employees.
With clients, first create a written credit policy on how far your firm will allow the client to get into debt. Even in rough times when you might be a little less choosy, you still need to screen that client for ability to pay the freight. Both you and the client deserve to know your limits in the terms of engagement. Every hour of your firm’s honest billable work is an extension of credit to your client. Factors to consider include your client’s financial health, payment history, your assessment of the client’s reputation, and the magnitude of the work you will perform.
Second, include a determination of exactly how your prepaid retainer will be applied, I recommended applying any retainer received to the final bill, and that the client pay the monthly bill separately from the retainer. This way you’ll always know that funds are available to pay your bill. The more transparent you are at the beginning, the better it will be for the relationship, especially if you are consistent with your follow-through.
Third, establish the retainer amount at the beginning. One good rule is never to allow a retainer to dip lower than an amount that will cover the next 30 days of anticipated billings. When you start to approach that limit, consult with the client and negotiate as needed. Be prepared to let the client go if you must for noncompliance; it could be the cleanest way to withdraw ethically. Clear and steady communication minimizes this risk. A healthy attorney-client relationship tends to increase the chances of timely collection or at least a reasonable expectation of when the bill can be paid.
With these steps, you build three vital legs for a successful business relationship: managing expectations, setting limits and guaranteeing getting paid.
Yet these three legs do not make a table unless you clearly communicate the steps listed above to your colleagues and employees: senior partners, junior associates, the chief financial officer, the office manager.
Aside from the obvious benefits of communicating policies to your people, there are more subtle reasons at work. The managing partner who minds the till can be in conflict with the hands-on partner wary of denting a client relationship by discussing collections. That partner should approach the discussion by listening carefully to the client while calmly making it clear that managing billing expectations is in everyone’s mutual interest.
Further, it is critical to establish a process for prompt conversion of work in process to build receivables. This can be audited monthly for some practices such as real estate and litigation, or quarterly for insurance defense or bankruptcy practices. (Personal injury and contingency firms are different matters, as their cash flow depends on settlement or verdict checks rather than hourly billings; but that is another column).
If your firm has already taken all the steps listed above, congratulations: you are in a successful minority. If not, clear your head, take a walk if you must, and get to work. These are all sound steps to take even in good times and will put your firm on more solid financial ground. They can help both you and your client maneuver with more confidence through the current economic storm, and perhaps even get a better night’s sleep.
by Dwight Hill
Executive Vice President
Sabadell United Bank
1111 Brickell Avenue, 30th Floor
Miami FL 33131
South Florida Legal Guide 2011 Financial Edition