Eliminate Your Receivables

Profitability

Eliminate Your Accounts Receivable, Once And For All

ISSUE:

Because lawyers and law firms do not discuss their fees and appropriately set up their fee agreements with their clients, most have very high accounts receivable and very often do not get paid for all of the work that they do.

ABSTRACT

Lawyers must take a stand to create integrity in their financial dealings with their clients. This includes being in full communication with clients about the fee arrangement in advance, and requiring payment before or at the time of the delivery of services. An initial meeting with a client should be conducted in 4 phases:

1. Get into relationship with your prospective client.
2. Discuss the facts.
3. Let the client know what can be expected from you. Make specific promises to the client and actually use the word promise.
4. Make specific requests and elicit promises from the client, including the promise to pay all bills within 15 days of presentation.

DISCUSSION

We live in a cash-and-carry world where payment is made at the time of the delivery of goods and services. The grocer gets paid, the dry cleaner gets paid, and our favorite restaurateur gets paid. So why, in this cash-and-carry world, is it common place for many professionals, particularly lawyers, to almost indiscriminately offer credit? Why are most lawyers shocked when I suggest there is another way?

Let’s look at the most common scenario found in most law firms. A prospective client meets with the attorney to discuss the case and what, if anything, the strategy will be. At best, a retainer is requested and hourly rates are quoted. Most often, however, fees are not even mentioned, except in some specialized areas, such as in contingency fee matters, insurance defense, criminal matters and others. If the client hires the lawyer, the work begins and periodic bills are mailed out. If a retainer is received, it is typically applied against the first bill and, thereafter, the client becomes a creditor of the firm. No real consideration is given to the client’s ability to pay.

What is the all-too-common result of this practice? The client receives a bill weeks and
perhaps months after services have been rendered, often when motivation to pay is at it’s lowest and when financial conditions may make it difficult or impossible to pay. Perhaps the bill arrives when the client is disappointed with the case results or is frustrated with the level of communication and relationship with the attorney.

The attorney now has an accounts receivable. In most firms, accounts receivable are anywhere from many months to a year or more worth of revenues. The vast majority of lawyers simply do not collect all of their fees and a great majority have to spend an inordinate amount of time collecting what is due.

And it gets worse. When lawyers turn such matters over for collection, what was once a harmonious relationship between attorney and client, becomes an acrimonious relationship. One day the attorney is the client’s friend and adviser and the next, an ogre trying to extract money. This less-than-satisfactory situation contributes greatly to the public's’ dissatisfaction with lawyers. In a recent Gallup poll, lawyers were rated slightly below funeral directors in-popularity. They are viewed by the public as insensitive, money-grabbing, unreasonable and righteous.

Most lawyers believe that the problem is with the client — the one simply unwilling to pay the bill. I disagree. The way a game plays out is always determined by the way it is set up and it is the lawyer who sets up the game. Let’s put the responsibility where I think it belongs — firmly in the lap of the lawyers.

If the corner grocer and the restaurateur can ask for payment upon delivery, why can’t lawyers? Why are we so willing to tolerate the agony and financial consequences caused by using the traditional approach when a far better alternative is available? Many reasons. The first one is, of course, tradition. But how did this tradition get started? Many lawyers consider it to be unprofessional to talk about money. We are, after all, servants of the court.

Another factor is fear. Many lawyers fear that their potential client will simply walk out the door and go elsewhere if asked to discuss payment terms. So instead, they run the risk of doing the work and hoping they will get paid. But many firms have gone belly up because of the inability to pay their bills. None of us can pay our bills with hope.

Perhaps the biggest reason for this practice is ignorance — many lawyers simply do not know there is another way. And I assure you, there is another viable alternative method to the traditional fee-and-collection approach.

Lawyers must take a stand to return integrity to their financial dealings with their clients. This includes a stand for being in full communication with the client about the fee arrangements in advance, requiring payment before or at the time of the delivery of services.

The whole issue of fees and payment terms must be fully discussed with every client, either at the initial interview or as soon as possible with existing clients. Whenever possible, a fee should be quoted ahead of services rendered and either the client pays in full, in advance, or periodic payments are made such that payment always precedes the expenditure of time. Where it is impractical to quote a fee because of ongoing work, an advance deposit — not a retainer — should be received in an amount sufficient to cover at least one month and preferably two months worth of services. This advance deposit should be placed in a separate “deposit account”different from the attorney’s “trust account.” It should be explained to the client that a billing will be sent at the end of each month and that the attorney will pay the bill out of the monies inthe “deposit account.” The client will be expected to replenish the amount withdrawn from the deposit account within fifteen days.

When fully implemented, this arrangement creates a perfectly delightful situation for the attorney and usually the client, as well. When bills are sent out at the end of the month, the firm can write a check immediately for payment-in-full. If the client does not replenish the fees within fifteen days, a conversation can be had with the client, well before getting months behind in billings.

Sound to good to be true? Well, I did it for eighteen years in my practice and in ninety-nine percent of the cases it worked. And, a great majority of my current clients have shifted to this approach with similar results.

What will it take from you? First, recognize that your present system does not work. Second, be willing to change. If you meet these criteria, I recommend your conducting your first meeting with a client in four phases as follows:

Phase One: Get into a relationship with your client. This is often overlooked or minimized, but it is highly important. What you will be able to accomplish in your future dealings with your client will be a direct function of the depth and quality of your relationship. Take time to make the relationship personal. Engage in small talk. Be genuinely interested in the answers to your questions. Do not, I repeat DO NOT proceed until you are satisfied that you have created some level of rapport.

Phase Two: Discuss the facts. Why is this client coming to see you? What is the case all about? Is this a client that you would enjoy working with? Do you feel competent to handle the case? When you are satisfied that this is a client you want and it is appropriate for you to take on the case, let the client know of your conclusion and secure the client’s agreement that you will represent him or her.

Phase Three: Let the client know what can be expected from you. Make specific promises to the client, and actually use the word “promise.” For example, you could say, “We promise to return your phone calls within twenty-four hours. We promise to send you copies of all documents we create or receive. We promise to keep you fully informed of all progress made in this matter. We promise to represent you the way we would want to be represented. We promise to give you a fair and accurate accounting of all services and costs. We promise to manage your case so as to minimize your expenses consistent with giving you the finest legal representation we can give you.”

Make up your own list of promises and make them powerful. While it may seem risky, I recommend them for several reasons. 1) It will create accountability on your part; 2) It will dramatically enhance your relationship with the client; and 3) It will give you the right to ask the client to also make promises.

Phase Four: Ask the client if there are any questions, and then suggest promises you might expect of the client. For example, you can ask the client to promise to return all of your phone calls within twenty-four hours, to be available at all times and all places to support you in the work that you are doing for the client, that you hear the truth the whole truth and nothing but the truth, that you be provided with whatever documents you require, etc. And, the most important promise is that the client support you in running your business in a business-like manner.

You have now set the stage for presenting your fee arrangement, stipulating your deposit requirements and your policy of sending prompt periodic billings. Request that all bills be paid within fifteen days of presentation. You can even let the client know that this arrangement allows you to run your practice in a business-like way, helps avoid spending time chasing deadbeats and the resultant need to raise fees to cover bad debts. The client’s willingness to pay the bills, and pay them promptly, will result in your being able to devote all of your time to being a lawyer and being able to keep your fees to a minimum.

Try it. I promise you it works. Not only will you dramatically increase the percentage of the fees you collect, but you will make an important contribution to returning a needed dose of integrity to the legal profession.

SUMMARY

Setting up effective fee agreements with a client is the responsibility of the lawyer. If the lawyer is willing to assume this responsibility, they will dramatically increase the percentage of fees they collect as well as making an important contribution to return a needed dose of integrity to the legal profession.