Financial management needs to be a priority especially for solos or boutique firms.
Picture this: a new client retained the firm, timely work was performed, invoices were prepared and sent to the client and yet those invoices remain unpaid. Sound familiar? Many law firms have very high accounts receivable balances that are aged over 120 days and these high and aged invoices directly affect the firm’s overall financial health. While it may be daunting to try and collect payments that are long overdue, many times, it requires no more than a simple conversation or the adoption of credit card payments.
First Things First: Prioritize Your Finances
Financial management needs to be a priority especially for solos or boutique firms. Many lawyers believe this is important, but not as urgent as obtaining new clients and servicing those clients. Also, there is usually a lack of understanding of financial statements. Without this basic understanding, a law firm can find itself in a very difficult financial position where there are more expenses than revenue. Law firms are ‘for profit” organizations. It is important to implement the best financial practices so the firm can thrive.
Start a Conversation
Accounts receivable starts with an initial conversation with the client about the firm’s billing procedures and when the invoices are expected to be paid prior to any work being performed. Many lawyers do not want to have these conversations with clients, but it is important that everyone knows what to expect. Clients should also know when they are going to be charged for costs advanced (i.e. court costs or filing fees). Yes, many times these issues are in an engagement letter, but an initial conversation should be had as well.
Leverage Practice Management Software with Financial Management Tools
A small firm may not be able to employ a full-time financial professional, but it is necessary to hire a professional who will work with the firm as needed. A small firm also needs to work with a quality practice management software provider that specializes in the industry. Purchasing the software is one thing, however, everyone in the firm must know how to properly use the application to take full advantage of its features. Learning how to maximize the features in a software application may require continual training, but that training will be worth the investment of time.
Accept Credit Cards
Many firms do not want to use credit cards because they do not want to pay the associated fees. However, having an unpaid invoice for 90 days is much more costly. Today, there are plenty of providers who work specifically with law firms. Depending on the area of practice, a firm can implement an option on its website to pay an invoice and also make it available on a portable device such as a phone. Many providers will help build the website and portable options so there is nothing for the law firm owner to do. Also, by using a third-party provider, a law firm does not collect and store any clients’ credit card information. It is important in today’s environment not to keep any credit card information, or have it accessible to employees, due to increased cyber threats.
Invest in a Collector
Law firms are hesitant in engaging a collection agency because they don’t want to pay the fees and they are also concerned about the agency’s collection efforts. I’ve heard from practice leaders who are concerned about being sued for malpractice when pursuing unpaid invoices.
It may make sense to engage in a collector who provides first party collections. This is where the collector works on aged receivables and represents himself/herself as a member of the firm and the collection fee can certainly be negotiated. The other method of collection is third party collections. In this situation, the collector is considered an outsourced collector and usually charges 30% of the collection. Many times, when accounts are over 120 or 180 days, it makes sense to go this route. There are some collectors who work primarily with law firms and have not initiated a malpractice lawsuit due to the engagement. They understand the concerns that lawyers may have.
Before investing in a collector, many times, requesting a client to pay an invoice takes nothing more than initiating a conversation. Someone representing the firm can ask the client how they thought the services were performed by asking specific questions about the engagement. This helps the law firm with future engagements with the client or other clients and will also help with getting compensated on a timely basis. Keep in mind that clients are more likely to be honest when someone other than the lawyer that represented that client initiates the survey and conversation.
In summary, aged accounts receivable has to be addressed on a regular basis. A process should be put into place in which after a balance has aged, conversations begin. When an unpaid balance is too aged, it is very unlikely that it will be collected which has a significant adverse impact on the firm’s net income and cash flow.
Written by CARET Legal partner, Gail Ruopp. Gail Ruopp has acquired more than 25 years of professional experience in senior law firm management, initiating best practices in administrative operations, including: financials, accounting, lateral recruiting, personnel, day-to-day operations, systems management, and firm marketing.