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Accounts not receivable

Law firms, smaller ones especially, could do a lot more to get paid in time.

Hourglass and money shadow

Every lawyer needs to get paid. But that can be a challenge for small and solo firms. Unlike big firms, they don't typically have accounts receivable departments (and the collections personnel to chase overdue accounts).

"Getting paid is actually a significant problem area for law firms," says George Psiharis, chief operating officer at Clio, a provider of cloud-based legal management software. According to data published in its recent Legal Trends Report, the average law firm misses out on collecting 14 per cent of their billables. "This type of problem suggests that law firms need to have better systems to keep track of follow-ups—or better tools to collect on what's owed," he says.

To stay on top of receivables, try focussing on a few simple rules. 

Get a retainer

Today's consumers are paying for purchases up front, whether online or in brick-and-mortar stores. But lawyers often bill by the hour after services have been rendered. This leaves them vulnerable to unhappy clients unwilling to pay after the fact.

"Someone once told me that if all lawyers made sure they got retainers, they'd no longer have to worry about getting paid," says Lonny Balbi, head of the Balbi & Company Legal Centre in Calgary.

Provided, of course, that the retainer is large enough to cover the case's costs realistically, without being so large that it will scare clients away. It also helps if the client agrees to pay a set amount each month to top it up, with any unspent funds being carried over in their balance. "This smooths out the charges against the client's account on a month-by-month basis, making it easier for them to handle," Balbi says. "This said, you must provide them with detailed information on everything that you've charged them for, to maintain their trust."

In the absence of a pre-arranged monthly top-up, lawyers should still ask for replenishment to avoid carrying the client's work-to-date as a debt.

"In doing this, we tell them precisely what we have billed against their account, so that they know they are getting fair value," says Allan Oziel, founder of Oziel Law in Toronto. "This is part of managing your client's expectations of what they are getting for their money."

Try fixed fees, but with caution

Increasingly, lawyers are offering simple services – such as preparing a basic will – for fixed fees and charging those fees up front. Some are even doing this on the web, and having clients reduce the workload by filing the necessary content themselves.

"On the other hand, these same clients are expecting to get more for less, and are prone to express any displeasure both privately and publicly," says Oziel. So if you are going to request money up front, you'd better be sure that your service is seen to be worth it."

Accept electronic payments 

When it comes to getting paid, Oziel is flexible. His firm accepts payments via credit card, e-transfers, and even cryptocurrency: "Contact us if you wish to pay in Bitcoin, Ethereum and other Cryptocurrencies," his website reads. After all, money is money.

It's a practice that sits well with Jared Correia, founder and CEO of Red Cave Law Firm Consulting in Boston. "When you allow clients to pay electronically, two things happen," he says. "First, you get paid quicker due to the convenience of electronic payments. Second, the payment processing company becomes your client's creditor, relieving you of that risk."

This second point is worth emphasizing. If a client sends a lawyer a cheque and it bounces, the lawyer has to chase down the missing payment themselves. But if a client pays through their credit card and then doesn't pay the bill later, the lawyer still has his fee.

Add preauthorized withdrawals that can be arranged through credit cards and other forms of electronic payment to top up legal retainers, and the small percentages charged by these companies (which are tax deductible) are worth it. For firms lacking the resources to set up an accounts receivable or collections department, this is a considerable reduction in business risk.

Dealing with collections

There will still be times when a small or solo firm has extended credit to a long-time, previously reliable client, who decides not to pay.

"You should have client policies in place about getting paid before you start chasing late payments," says Correia. "There should be an actual workflow that manages payments from the first day, to avoid facing a number of long-overdue accounts out of the blue."

It's why it's essential to check receivables every week. A basic business accounting like QuickBooks provides this data through its 'Open Invoices' report.

It's best to contact clients about overdue invoices by email, then follow it up with a phone call a few days later. Careful with the approach. Be helpful and positive, and always start by giving the client the benefit of the doubt. Then see if you can arrange payment over an agreed-upon timeframe.

Warning: The longer a client account goes unpaid, the less likely it will ever get paid. "Good luck collecting on any bill more than 90 days out," Correia said. "It is at this point that you turn the bill over to a collection agency, who will get a portion of the payment should they manage to collect."

The bottom line

With the right mix of retainers, fixed fees, electronic payment options, and flexible collection practices, small and solo will see their collection rates rise steadily.