Collect Call: The Best Way to Handle Accounts Receivable is to Eliminate Them

As a business consultant to solo and small firm lawyers for the past decade, Jared Correia has helped lawyers deal with many law practice … issues. In his column, “Law Practice Confidential,” he will be answering real questions from real lawyers. To send Jared an anonymous question, use the form at the bottom of this post.

Q: Billing is the worst. I feel like I never have any money. Then, I’m like, ‘Oh wait, I haven’t billed anyone for three months’. But, when you wait that long to bill, the money adds up, and it’s harder to collect. Once, I did try to collect from a delinquent client, and it was a huge waste of time and money. The worst part was, I didn’t collect any more money than I would have if I hadn’t done anything at all. Can you help me to feel like I’m making the money my balance sheet says I am?

–DW, Elwood City

A: It’s funny that way when you’re a practicing lawyer. Up until the time you have to start managing your own law firm, you just focus on the work, and the money naturally follows. It’s like some elf picks a golden apple from a magical tree and direct deposits its cash value into your bank account, but when you’re the boss, the fairy tale turns into something Shel Silverstein wrote: bittersweet, wistful.

For most small firm owners, accounts receivable are a money pit. Lawyers often don’t know how much they’re owed, or when it’s due. If there is a system in place, it functions to move unpaid billings forward, which, when piled up, become increasingly less likely ever to be paid. Generally speaking, if a lawyer isn’t paid immediately, or at the initial invoice, that lawyer isn’t paid at all. If you hire someone to collect the debt, you’re potentially throwing good money after bad, without ever realizing a result. And, if arbitration or litigation ensues, you’re in the unenviable position of potentially having to reveal client confidences for the sake of making an extra buck, which isn’t a good look, even if you’re not wrong to pursue the claim.

Of course, I’m being a little disingenuous. While it depends on your practice area, and how you bill, as a lawyer, it’s unlikely that you will be able ever to eliminate accounts receivable. That does not mean that you can’t reduce your accounts receivable, which necessarily means you’ll have less to collect.

Let’s count the ways:

Be a better vettor. One of the common reasons lawyers don’t get paid by their clients is because they’re servicing the wrong clients because they’re picking the wrong leads to convert. You should have an ideal client in mind and preferably a checklist for determining whether the person sitting in front of you is one. And, one of the major criteria for selecting a client is whether they can pay you. If a client is haggling with you and wondering about discounts, that’s a bad sign, and it means you should cut and run. If a client is unwilling to pay you a reasonable retainer, that’s another indication that they’re not bona fide. Most lawyers don’t like to talk about money, but you need to have the money conversation up front, as well as the courage to walk away if the money’s not there.

Retainer. One of the best ways to determine whether someone will pay you moving forward is to ask them whether they will pay you upfront. If they equivocate, or if they can’t come up with the money, that’s a fair indication that whatever you’re going to get then is all you’re going to get. Attorneys don’t take retainers for all kinds of reasons, such as not wanting to manage the trust accounting obligations. They also reduce the retainer amount they should be taking for all kinds of reasons, like being afraid higher initial pricing will reduce client intake. However, most of those reasons are exactly why lawyers should be setting and holding firm on retainer amounts. Understanding and applying trust accounting rules is an essential component of law practice management; and, scaring away the clients who can’t, or won’t, pay you is kind of the point. Take the time to judge the value of your work and place a monetary amount on it that is fair to you and reasonable for the client. Then, stick to your judgment. If you don’t get the retainer you need, move on to someone else who can pay it.

A standard retainer isn’t your only choice if you (and your clients) like options. A classic retainer is a continuing payment for your availability and does not fall under traditional trust accounting guidelines. An evergreen retainer allows an attorney and client to agree on a static retainer amount, with the client’s obligation being the replenishment of that retainer at set intervals. While not a retainer, moving from an hourly to a flat fee arrangement will allow a lawyer to take in money upfront, with the potential to avoid trust accounting requirements as well.

eCommerce. If you’re still taking traditional checks, that may be one of the reasons you’re not getting paid in the first place. Even if you are completely comfortable with the high value of your services and even if your clients understand that value proposition, it’s still tough for the average person to draw a cashier’s check for a few thousand dollars in the face of stagnating wages and increasing inflation. Many solo and small firm lawyers could not outright pay the retainer amounts they seek. Why not accept electronic payments instead? Giving a client the option to pay a retainer using a credit card means that the client and the credit card company are the ones who set the actual payment terms. You get paid, and the client pays off the credit card charge over time.

Just stop it. One of the significant reasons accounts receivable pile up for attorneys is because lawyers have a terrible habit of burying their heads in work and continuing to perform for clients even when those clients have not (and do not) intend to pay them. While I understand that it’s not possible to extricate yourself sometimes, in most cases, lawyers can terminate business relationships in much the same way that their clients could. But generally, the lawyer doesn’t even know that the unpaid amounts keep adding up because they’re not checking. And, that combination of financial ignorance and unthwarted drive are deadly. The truth of the matter is that knowing a client owes you an untoward sum of money is one thing, and having the courage to stop working for that client, and formally sever ties, is another thing altogether.

If you want to take home the money you’re making, it’s time to start paying attention to your accounts receivable, and to act to reduce that figure simultaneously.

Get paid early, and often; and, maybe you’ll finally be able to afford that Plymouth Superbird.

Collect Call: The Best Way to Handle Accounts Receivable is to Eliminate Them was originally published on Lawyerist.com.