I’ve been examining various aspects of law firm cash flow over the past few weeks. As mentioned previously, it’s essential that you have a system in place that tracks precisely how much money the firm is bringing in daily, weekly, monthly, quarterly and annually. Also, you need to know how much money is collected at the initial consultation and how each of these numbers are represented by case type. To be useful and efficient, that system needs to be automated.
Your cash flow system should track what the firm has billed and the fees actually collected. Further, we have proven that all good collections systems begin at the point the client retains your firm.
Walking the Line Between Collections and Ethical Responsibility
A young attorney I met recently mentioned a seminar she had attended on the ethics of fee collections. The presenter told the attendees that the best way to avoid ethics complaints is to not pursue unpaid bills. I was a little stunned, but I can understand the presenter’s point. If a client refuses to pay the bill, then he or she was either dissatisfied with the quality of service received or dissatisfied with the outcome of the case. With the former, an attorney would be prudent to try to make things right with the client (including a fee discount). But with the latter, a result that didn’t make the client happy but was not anything the attorney did wrongly, then fear of an ethics challenge should not keep that attorney from seeking payment for services rendered. (There’s also another possibility, the client wants more for less or for free.)
I dug deeper and found an interesting article on fee collections…
The Ethics of Charging and Collecting Fees by Massachusetts attorneys Nancy E. Kaufman and Constance V. Vecchione. The first sentence is illustrative: “Lawyers’ fees are a frequent cause for complaint to the Office of Bar Counsel.” To resolve fee disputes, the authors recommend that the attorney “provide written explanations and itemizations of the fees charged or advising the parties of the availability of fee arbitration” or mediation.
Admittedly, collecting legal fees has its unique challenges. My objective today is to make you aware of the importance of systematizing collections so they are consistent, pass ethical muster (and avoid bar complaints), and bring home the bacon.
Get the Client, Do the Work, Collect the Fee
Attorney and author Edward Poll described the business of law in Getting Paid: A New Look at Fee Collection (ABA Law Practice Management Section) as having three components:
“Win the work… Do the work effectively and efficiently… Get paid…”
Collections is the third prong in a three-part process. No attorney will ever succeed at business by accomplishing part one and two without satisfying part three. Yes, you need to get those billable hours in, and doing so should give you a real sense of accomplishment. But that’s not enough. You need to focus on collections, too.
Are clients’ checks bouncing?
Are you only receiving partial payments?
Is the client dragging payments out for too long?
Did you underestimate the retainer and now the client resists paying additional funds?
Is your client insolvent?
If Clients Don’t Pay, Your Collections Aren’t Working
You have a defined relationship with your client. When the client pays the bill every month, on time and in full, then your collections system is working. But when a client isn’t paying, the attorney-client relationship is miss-firing. You’ll resist doing more work for that client (rightly so). Your client will be less than forthright with you (predictably so). Trust is jeopardized. Needless to say, communications are less than honest when bills aren’t paid as originally agreed in the written fee agreement.
With big law firms, a few bad debts are less burdensome. But for small, boutique, and solo firms, an ineffective collections system has an immediate and substantial impact on cash flow. You’ll see it in your take home pay!
Pavlovian Response Isn’t Just for Dogs
Well-meaning attorneys often make the mistake of continuing to do even more work for the non-paying client. To win them over? To train them in good payment habits? To win respect?
If this is what you’re doing, then I have to ask: Did you really intend to extend credit to a client? Because that’s precisely what you’re doing.
Think of it another way. If you always only collect 85% of your fees, you are always working at a 15% discount, is that ok with you? Would you have discounted your rate by 15% if the client initially asked you? To put that into real dollars, if you bill at $300 an hour, you’re actually collecting at $255. If that makes sense to you, then send me $20 and I’ll send you $17 back, every day and twice on Sunday’s.
I have a suggestion. Minimize the C and D clients and cultivate your A and B clients. A barely passing grade will not advance your goal of operating a successful law practice and obtaining wealth. You’re going to get a Pavlovian response – conditioning to reinforce existing behavior – if you don’t collect for services and keep logging precious hours.
I’m not talking about leaving a client in a lurch. Besides you cannot ethically end representation when doing so will prejudice that client’s case. But by tracking each client’s payment history, you put yourself in a better position to terminate and withdraw earlier rather than later. Rule 1.16 (declining or terminating representation) of the ABA Code of Professional Conduct is pretty clear on what you can and cannot do when it comes to unloading a non-paying client. You don’t want a bar complaint resulting in your having to eat the loss by providing involuntary pro bono services.
Do You Have a Written Collections Policy?
If you don’t have a written collections policy, then create one and include it in your firm’s fee agreement and engagement letter. Start by assuming that every client – regardless of business acumen, trustworthiness, or how well the relationships begins – is going to end up being a collections problem. Make sure to include these points in your collections policy:
● The firm’s credit terms
● How late and missed payments will be tracked
● How clients will be contacted by the firm when payments are missed
● When the firm will follow-up with unpaid client bills
● When the firm will stop work on a client’s case for nonpayment
● Appoint a collections manager within the firm
● Create incentives for each attorney to stay on top of their client collections
● Automate collections to track every statement and payment, from case beginning to end.
The policy and tracking system gives you control so you can take swift action. That’s how you prevent nonpaying clients from further tapping your firm’s resources. When a client’s account is overdue, you have to take immediate collection action to get those overdue funds into the firm’s account.
What Are You Going to Do About It?
What are you going to do about it when your client doesn’t pay? Well, stop working for one! Comply with ethics rules of course, that’s a given. But stop working for the client who hasn’t held up his side of the bargain. Then talk to the client, ask how he or she proposes to resolve the problem.
Whatever you do, don’t jump to reducing your fees just to get some of the money. The client’s failure to pay isn’t about your fees or he wouldn’t have hired you in the first place. Just make sure you do what you can to resolve the dispute. Be ready to provide all documentation supporting the fees, expenses, and costs that were charged. If the client complains about being charged too much, then he is likely fishing for a discount. When all of your efforts have failed to collect what is owed to you, consider giving the fee discount and firing the client (I mean that figuratively). Not because the client is always right, but because you don’t need to waste more time on collections and the possibility of having to answer a bar complaint, notifying your malpractice carrier, pulling records and so on. Some clients, no matter what you do, will insist on a discounted rate, tie up your staff’s time with their poor payment practices, and serve as a steady drain on your firm.
Percentages are essential to a guy like me, so I’ll leave you with a few today:
You have an 89% likelihood of collecting on a bill 60-days past due. That falls to 67% for bills 180-days past due. And by the time the bill is one year past due, you have a 45% chance of collecting. Time is money! Automate you collections system today and watch your cash position improve!
Building a better business, one collection at a time…