Solidify Your Collections Policy Now — Or Pay Later

In past Coach's Corner columns, I have stressed the importance of staying on top of overdue accounts. This column will get more specific. Overdue accounts are bound to happen, but the longer you wait, the harder they will be to collect.

Every firm, no matter how large or small, needs a formal, written collections policy. You want to have everything in place from the moment a client does not pay your bill so you can immediately begin collection efforts to keep you're accounts receivable low and to keep losses to a minimum.

A sound collections policy has two overarching functions: (1) how to track when clients are behind on their payments; and (2) how to proceed with clients when they are late with payments. The details of the policy should cover everything from the beginning of the client relationship to the payment of the final bill.

Equally as important, you need to provide the policy, in writing, to every lawyer in the firm — and demand strict adherence to it. You also want to involve staff members at appropriate levels, educating them about how to identify and communicate with problem clients.

Here's a list of some of the essential components of a sound collections policy, including structure and enforcement.

Sample client forms

You cannot expect the lawyers at your firm to use the requisite forms faithfully unless you include copies in your collections policy. Provide samples of a client intake form, a fee agreement and an engagement letter. Be sure to provide them in electronic versions, so secretaries can type in the required information before asking clients to sign them.

Credit policy

Everyone at the firm should know its formal credit policy and how the terms of credit apply to their clients.

Collection terms

Collection terms establish debt boundaries and response actions — meaning that, as a firm, you must decide when any client account becomes past due. Is it 30 days or 60 days after the bill has been sent? Once that's determined, you must then decide when action on a past due account will begin. When does someone call the client? At what stage does the firm stop work because the fee has not been paid? How long before the firm sends the account to a collections agency?

Enforcement policy

Even the best-managed collections process will not work unless every single billing lawyer in the firm buys into it. That's why you need a written enforcement policy outlining the consequences for lawyers who continue to work for clients whose accounts are in arrears.

The best approach includes both an incentive and a penalty. Bonuses might be awarded to lawyers who reach a designated realization rate (i.e., percentage of collections of fees billed). On the penalty side, the firm might withhold payment of a lawyer's "draw" until that individual complies with the firm's collections policy. Another approach is to assign someone else to handle the collections for the lawyer who ignores this function and then deduct that expense from the share of the profits otherwise attributable to the attorney. (However, punishment by withholding compensation cannot be used against associates. They are employees, not partners, and are governed by different rules.)

Collections management

To ensure that your collections policy is applied consistently, you need to assign responsibility for the policy's management to one person. Solos and small firms may have to hire a collections manager, even if only part time, to be responsible for several tasks, including:

1. preparing accounts receivable aging reports, which show how old each client's billing is and how much each client owes in consecutive 30-day billing cycles;

2. contacting clients who have gone beyond the terms of their payment agreements;

3. alerting lawyers about clients who have not paid; and

4. monitoring the collections process.

Depending on the size and capabilities of your firm, it can make a lot of sense — both economically and to maintain good client relations — to pay someone to handle this end of your business while you work on the clients' legal matters.