Why is a sales guy writing about receivables and collections? That's easy. The sale isn't complete until the last dollar is collected. It appears that only about 60% of lawyers' sales are complete.
LexisNexis recently published Law Firm Billing Survey: Collections Conversations Leave Lawyers Uncomfortable, which contains the eye-opening results of a survey of accounts receivable for small firms and solos. Apparently, a lot of lawyers are doing more pro bono work than they intend.
For solos and small firms, four out of 10 client accounts are past due, despite 71% providing discounts or writing off legal work even before invoicing clients. Once these accounts are 90 days old, almost half of those lawyers consider it unlikely that they’ll collect. According to the Maryland State Bar Association, they’re right. Their statistics show that an invoice over 60 days has only a 70% chance of being collected in full. After 90 days the chance of collecting the invoice in full drops to 45 % and after 120 days, it falls to 20%.
The impact of this is staggering. If these arrears are largely uncollectible, the best the lawyer can do is break even. Most law firms have a gross profit margin of roughly 32-36%. If you fail to collect 39% of your receivables, you’re working really hard to operate at a loss.
It’s hard to stay in business when you don’t get paid. So, why aren’t lawyers getting paid?
According to the lawyers surveyed, “client financial hardship” is the culprit. Forgive me, but I’m having trouble believing that a third or more of your clients are in financial straits. That would be hard to achieve if you were actively seeking companies with precarious finances. If that’s truly the case, you’ve got seriously flawed marketing, sales and intake habits.
While there will always be a small percentage of companies who get into financial trouble and can’t pay, and it will spike during widespread downturns such as the recent Great Recession, over time, that excuse simply won’t hold up to scrutiny.
Lawyers admit to a much more believable reason: Asking a client for money is embarrassing, uncomfortable and for some, even “distasteful.”
Here are some comments that survey respondents offered in response to open-ended questions:
“Attorneys have a problem asking for money after the retainer and throughout the process of working.” (veteran paralegal supporting a Florida-based family law practice)
“[It] makes me feel greedy to call a client about a past due bill or to issue a written past due statement.” (attorney in an Ohio-based law firm with 1-2 attorneys)
“At my firm, the attorneys have to make collection calls to any clients that are late paying. I would prefer to have a staff member take care of that. I find it damaging to my relationship with my clients, and distasteful.” (attorney for a California-based law firm with 6-10 attorneys)
To that I'll add "hourly billing." This business practice has billing- and collection delay built into it. According to the LexisNexis survey, law firm billing requires 8 hours of work. Most small law firms (61.5%) reported spending about eight hours per month on their billing process although about a quarter say it can take up to 16 hours. That makes it likely that you won't do it immediately; you'll wait until you have a chunk of time to spend on it. If it takes you 8-16 hours to prepare a bill, how long does it take your client to set aside time to review it, understand it, reconcile it, and approve it for payment? Anything you can do to simplify your billing will speed up payment.
So, apart from dumping hourly billing, what can lawyers do to get paid?
Market and sell differently. Most collection problems are value-recognition problems that are created by lawyers’ failure to establish expected/perceived value during the sale. That means they can be eliminated during the sale.
Bill promptly and accurately. Client surveys show that many lawyers are slow to bill, which irritates clients and foments a psychological justification for slow payment. “You took your time invoicing me; I’ll take my time paying you.”
Collect immediately, and don’t allow any slack. Because it’s such a difficult and time-consuming chore, owners of most small businesses, not just lawyers, put off collection efforts until receivables are 90 days or longer past due, or they just decide to write off old receivables as uncollected. This encourages your clients to exploit your bad habits. When clients are allowed to take their sweet time to pay their bills, it sends a message that it’s OK to do so. Given that message, clients will take advantage of you. If a firm allows a client to go beyond 60 days past due, there is a 62% probability that it will occur again. If you allow it a second time, there is a 95% probability that all future accounts will be paid beyond 60 days.
Expect to be paid. This is a fundamental attitude shift, without which none of the other tips and techniques will work.
Here are six other recent posts offering ways to assure prompt, full payment:
Collection tip #1 above is the most effective of the four offered because it prevents the collection problem in the first place. Upfront, establish the impact your service will have on the client’s problem or circumstances, and translate that into the economic Cost of Doing Nothing. This sets you up as a return on investment rather than a cost. Take a look at RainmakerVT’s “Cost of Doing Nothing” simulation, which teaches you this critical skill via a simulated discussion with a prospective clients. It's the second of a three-part decision process that will simplify your life.