Today’s law firms are learning that improving the firm’s A/R is not just the responsibility of the collector. In order to truly be successful, it must become a collaborative effort between the collector and the firm’s management. Firms are also learning that the collections process does not begin when the account becomes overdue. The collections process begins at client intake. In conjunction with methods for client intake and billing processes, the person who is responsible for collections has to have the necessary tools, action plan, and support in order to be effective. The difference in collecting for a law firm lies in the culture and mindset of the members of the organization. Many attorneys forget one of the most important steps to profitability and cash flow: billing promptly and collecting on those bills.

The longer an account remains unpaid, the lower the probability of collection. The results of a recent survey of members of the Commercial Collection Agency Section of the Commercial Law League of America show that at 3 months delinquent, 27% of accounts receivable will not be collected; at 6 months delinquent, 43% of accounts receivable will never be recovered; and at 12 months delinquent nearly 75% of delinquent accounts will have to be written off.

Collectability of Deliquent Debt

Steps to Improve Average Days to Collect

Write a Policy. Your firm must have a detailed policy on how you want your customers to pay. This step is crucial to the collaborative effort between collector and attorney.

Spell it out clearly in writing. First, you have to review what your firm is doing right now and document it. Then you need to consider those policies and make decisions. Some questions to consider:

• What steps are in place for client acceptance?
• What is the policy for capturing time? Penalties for late time?
• What are the acceptable billing timeframes?
• When does the collection process begin? 30 days? 60 days?
• What are the steps to be taken in the collection process? A phone call first? Followed by a letter or another phone call? What is the outcome desired of these steps?
• What collection activity is expected on an account by days delinquent and balance of account?
• Will billing attorneys be involved in the process? If so, when and how?
• How much room does the collector have to negotiate?
• How long will you work on unpaid accounts? ~      What are the consequences for non-payment?
• How will discounts or write-offs be handled? Is there a termination of services policy?

Allow room for exceptions. The policy need not be rigid. It is easier and better business to make exceptions to a policy than to make it up as you go along. Without a policy, collectors do not have clear direction and the potential is created for each client to have a separate policy.

Timely Billing. Smaller, regular bills tend to be paid sooner. The more timely the bill, the more timely the payment. And a timely bill reduces the chance for questioning of the bill later. What is timely varies widely. In most successful firms, “timely” is considered to be WIP to billing attorneys by the 5th of the month, reviewed WIP and instructions to billing department by the 10th, and bills out to clients by the 15th of the month.

State your terms. Make sure invoices and statements have the payment terms clearly printed on them. Disclose discounts you allow for early payment and penalties you assess for late payment. Unless you want to provide free financing to your customers, add and collect late payment charges.

Timely Collections. The biggest impact you can make is with new clients.

You have an opportunity to convey your tight receivable policy right from the start. If you have 30-day terms, you should be on the phone with the client on day 31. If you choose to send out a reminder letter (statement of account) first, the message you are really sending is that you have 45-day terms. Why is that? Because you let the client know that whenever a bill is received from you, if it is not paid within 30 days, they’ll get a letter one week later and a follow up call after that. One of the major causes of overdue receivables is that the client is not educated to pay in a timely manner.

Letters and reminders are not that effective. If the client has not paid by the first or second reminder, something is wrong. Chances are slim that they will pay after the third or fourth reminder. Letters are one-way communication, and they don’t fix problems.

Resources. Whether your firm has an entire collection department or one part-time collector, the resources they need to effectively collect must be afforded to them.

Systems

Educate your collector on the firm’s collection policy and then give them the tools necessary to carry out that policy. There are excellent collection software systems available for all firms no matter the size. There should be an adequate medium for recording, collecting, and providing data to collectors and management.

Whether or not your firm utilizes a software system, make sure that the collector documents all efforts to collect. The shortest pencil is better than the longest memory.

And be sure your collector is working most effectively. Remember, the longer an account remains unpaid, the lower the probability of collection. A collector may fall into the trap of trying to collect on accounts that are 6 months overdue instead of focusing on the 30 day accounts. If they are going to spend the time and effort, make it count.

Support

A resource not commonly thought of is firm-wide support of the collector. If the collector and the attorney are not “playing off the same sheet of music,” ineffective collections will be the result. Many members of the legal profession do not understand, nor do they want to be involved with stressful collection actions. However, they need to support, or at least not hinder, the collector’s efforts to help them.

Although introducing attorneys to the concept of DSO (days sales outstanding) might be pushing the limits of educational efforts, they should be informed of such business techniques as the cost to carry A/R; the extra business required to cover a bad debt write-off; the concept of the older an account becomes the harder it is to collect; and the importance of timely, persistent collection efforts.

You should now have a basis for critically examining your company’s current policies and procedures on collections. The ultimate goal is to recover the maximum dollars from the current and future inventory of dollars locked up in your accounts receivable. Your firm’s average days to collect will improve if only a few of the ideas mentioned are implemented. The business health of your firm depends on it.

About our author . . .

Laurie Kiser is the Product Manager at Select* Associates, Inc. [www.selectsa.com]. Select* Associates, Inc. provides quality software and services for the nations top law firms and has developed an innovative collections management product, *Collect. For more information or details, Laurie can be reached at (888) 243-0852 or by e-mail at lkiser@selectsa.com.