Devoting Energy to Payment Collection is Time Well Spent

It recently became clear that a client had a major problem because he was maintaining a large receivable listing. In other words, the receivables were old and there was little effort being made to manage and collect them.

My advice was to "stop working" on seeking new matters and focus all his energy on collecting the accounts that were overdue. Even if he did not work for the next 30 days on any new legal matters, the amount of money that he would bring in could be the equivalent of many months' revenue.

After 30 days, the attorney reported to me that a substantial amount of the receivables had been collected.

This may be an extreme example, but it illustrates a basic truth. For any lawyer, the order of priority is to get the work (marketing), do the work (production) and get paid (collections). The lawyer in my example was obviously successful at marketing and production, or there would have been nothing to collect. His focus needed to be on balancing that effort with the collections function.

For too many lawyers, the marketing and production sides outweigh collections. They equate financial success with work done, measured in billable hours. But a lawyer's inventory is not billable hours – it is the amount of cash that is realized from the billable hours outstanding. Realization is simply the percentage of what is billed that is actually collected. The greater your billings, the more effort you should devote to getting cash into the firm.

When you bill clients, you are extending them credit. Low realization means you need more cash to stay in business while waiting for clients to pay.

Stop extending credit

The road to disaster is continuing to do marketing and production with the same clients, extending credit rather than collecting fees in the hope that these clients will give you more work.

Strive to get paid quickly for the work that has already been done. If the client hasn't paid the fee for the last matter while you begin work on the next, you have in essence extended a no-cost loan to the client. Just as most banks will not carry you in the hope that you will pay on an outstanding loan, it makes no sense to do the same thing with your clients on a vague hope of being paid as expenses pile up.

A suspension of all but the most essential marketing and production activity for a defined period of time will allow a lawyer who is behind on collections to focus on realization. The goal is to have a high collected to billable ratio. An overall realization rate of less than 85 percent is unacceptable.

Make sure you can afford a full practice halt. A lawyer in solo or small firm practice should maintain a cash reserve that can cover four to six months of typical billing. The four month figure reflects the national turnover ratio for law firms, which according to past surveys is often as much as 120 days. In other words, a firm should assume that under normal circumstances the money could take that long to come in. The more client invoices you have outstanding, the more cash you'll need while waiting for payment. You will need money for supplies and equipment, staff support and office space. While you're waiting for clients to pay you, vendors, banks, landlords, utilities and tax collectors expect payment immediately. Make certain you can meet the demands during a practice halt.

While a practice halt to focus on collections may be a one-time remedial tactic, the real cure is obvious. Lawyers must vigilantly focus their energy on collecting what they bill. Failure to do so will cause economic disaster. Unlike good wine, accounts receivable do not get better with age.