7 Mistakes in Managing Accounts Receivable – and 8 Solutions
By Jake Krocheski, Managing Consultant
As you approach mid-year, this is a good time to learn from your past mistakes and make changes for the future. Bad things do happen to good law firms, which is why you should watch out for the following mistakes.
Mistake #1: Firms continue to take on new clients with little or no assurance that they will pay their legal bills. Because intake procedures are poor, it ends up being the clients rather than the lawyers who dictate when – and, sometimes, if – they will pay.
Mistake #2: Firms continue to accrue large amounts of unbilled time and expenses. Most clients actually want to be billed on a monthly basis. Lawyers do not understand that if they send bills only when it is convenient for them, their clients will choose to pay at their own convenience.
Mistake #3: Lawyers fail to understand that if they see that bills have not been paid within 30 days, they are seeing the first warning sign of a collection problem. If the firm does not take action to get that bill paid, receivables could easily go past 90 days. Clients conclude that if the firm has waited several months to try to collect unpaid bills, they need be in no rush to pay them. They reason – and, unfortunately, they are not wrong – that the longer their lawyers wait to collect, the greater chance they have of having their bills discounted or written off altogether.
Mistake #4: Firms have been perhaps too quick to embrace alternative payment arrangements to help relieve clients of cash flow problems. Complex transactions may not lend themselves to a regular payment schedule, and they may cause confusion as to appropriate payment if the deal does not come to fruition. Furthermore, risky client engagements sometimes fail, leaving a trail of unpaid receivables.
Mistake #5: As lawyers become inundated with work, they can ignore the fact that their clients are not paying their bills. They become so wrapped up in their work that they fail to recognize a point at which they should stop doing that work, rather than continuing to amass unpaid bills.
Mistake #6: As part of their effort to “push the work down,” senior attorneys often pass responsibility for collections to lower-level attorneys and/or paralegals. Asking clients to pay their bills is not something attorneys and paralegals have been trained to do.
Mistake #7: Accounts receivable reports are being ignored until the year-end push. Whether attorneys don’t receive the reports or simply are not paying attention to them, the net result is that the reports are not having the desired impact.
Not only are many firms carrying as much as 40% of their receivables over 90 days, but they have no clue how much of that 40% they can reasonably expect to see paid. The good news is that a law firm’s problems with ageing accounts receivables can be fixed. The not-so-good news for not-always-patient lawyers is that the fixing takes times and dedicated, consistent efforts. A firm’s culture, which allows receivables to age, cannot be changed overnight. But there are ways to remedy these mistakes. Part of the solution is to run law firms as the businesses they are rather than collegial professional service organizations that do not focus on day-to-day essentials like getting their bills paid.
Solution #1: Don’t make the mistake of thinking your firm can collect itself out of a receivables problem. Taking decisive action to collect aged receivables may help cash flow in the short term, but without fundamental changes to prevent collection problems, the lawyers will quickly return to their bad habits and the firm will find itself in the same dilemma down the road. Long-term remedial changes must be made. The firm must fully evaluate its client/matter intake process as well as its system for identifying problem receivables early on – and take action before it is too late.
Solution #2: Forget historical patterns of bill collections in which you assumed that collections would increase as the year progresses. On a monthly basis, firm management needs to measure monthly revenue projections, and it must be realistic about whether the firm is underachieving in its collections goals. Also, remember that just because billings are high does not guarantee that collections will be high, too.
Solution #3: Identify bills that you can get paid. The reports still used by many firms do not clearly differentiate between receivables that are likely to be collected and those that are not. Receivables should be categorized as (1) those that are collectable, (2) those that are problematic, and (3) those that will not be collected.
Solution #4: A good test of the client’s ability and willingness to pay is whether they can and will pay a retainer. Teach attorneys that making efforts to get paid for work done is hardly unprofessional. Clients will not be offended.
Solution #5: Teach both your attorneys and your clients. Train attorneys and hold them accountable for following billing and collection guidelines. Training should include younger attorneys – your future partners. The message must be made clear to all attorneys: it is no longer acceptable to let clients pay whenever they choose to. At the same time, teach clients that their unpaid bills are being monitored. Create a system in which trained staff members contact clients when a bill has aged past 30 days to find out when it will be paid.
Solution #6: Identify practice areas that have particular difficulty collecting their receivables and analyze why clients are not paying their bills. Pay close attention to practices with non-institutional clients, such as family law, that may have cash flow problems.
Solution #7: Equally important, identify your lawyers who have particular difficulty managing their receivables. Keep a sharp eye on their receivables. Either provide them with assistance or take responsibility away from them altogether. Let them know that while a blind eye could be turned on mismanagement in the past, it will no longer be tolerated.
Solution #8: Put the right people in place to help manage and collect your receivables. Staff should not be evaluated on how they keep attorneys happy by getting them copies of bills. If you have staff in place, determine how many direct contacts they make daily; more importantly, determine how many actual dollars they are collecting, including older, difficult accounts. Determine which collections can be tied directly to the efforts of staff. An alternative for many firms today is to hire outside professional consultant A/R managers to manage and collect your accounts. These trained professional strictly work with the legal profession and have become a resource for many firms.
Jake Krocheski is President of Client Connection, a national company that focuses its practice on helping law firms manage their accounts receivable.
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