Collect First, Market Second to Remedy Sinking Revenue

Published on: 
07/24/2013
When a health problem arises, many are quick to jump to a conclusion about the cure.

Yet what we initially perceive to be the problem may be inaccurate. Insomnia is a perfect example: People often try over-the-counter medications or seek a doctor's prescription to remedy the situation, yet many sleep experts primarily recommend simple changes, such as not drinking alcohol or eating right before bedtime, following a regular sleep schedule and/or eliminating electronic distractions.

Transfer that lesson to law practice revenue. When there's less money coming in the door, many lawyers immediately jump to a conclusion that "the cure" involves more marketing. But the reality is that declining revenue is just as likely to be a problem with receivables.

Keeping the accounts receivables pipeline full means ensuring that the client work secured and completed is collected as revenue. Never extend credit to current clients if they have not paid for the work already done.

Marketing to and producing for the same clients while continually extending credit in lieu of collecting fees is a road to disaster. Securing more work is great, but not until those "productive" clients pay what they already owe.

When the problem is clients who don't or won't pay, generating new work to cover declining revenue simply isn't the answer. Make sure clients know they must pay their bills within 30 days. Specify clear collection terms in the engagement agreement.

Lawyers tend to perceive every client as valuable and hate to drop one, but the reality is that continuing to do work for clients who don't pay exhausts your resources without providing the corresponding revenue to pay for them. Those clients are simply not worth keeping.

A 2013 study by George Washington Law School showed that realization rates (the percent of billed fees that is actually collected) average 83.6 percent for all law firms surveyed — a historic low at approximately 8 percent lower than the 92-percent level found at the end of 2007. (For the nation's 100 largest firms, the realization rate is even lower, at 82.8 percent.)

If you realize only 80 percent of what you bill, you will need to treat that 80 percent as 100 percent of your income in order to survive. In other words, all your financial decisions, including how much revenue your firm needs, will need to be based on the money actually collected, not on the billings. If you can run your business on the 80 percent, fine — but few lawyers can.

Rather than working tirelessly on new clients, what you may really need to do is stop chasing and focus your energy on the overdue accounts. Even if you do no marketing for 60 days, instead applying that time to collection of accounts receivable, the amount that you bring in could be the equivalent of many months' revenue.

In sum, if your revenue is down but you're downplaying the reality that you only collect 80 cents on the dollar, you and the insomniac likely will have another thing in common: lots of sleepless nights.

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