“Receivables are my biggest problem,” he said as he sighed.
Just saying the word “receivables” deflates him.
We drilled down. Revenue last year of $450,000. Receivables of $225,000. It’s him and an associate. They’re billing hourly, and a third of what they’re billing isn’t getting paid on time.
“How much of it will you collect?” I ask. He says, “We’ll clear most of it up within about six months of the due date.”
“Clear it up?” I wondered out loud.
He explains that they’ll collect some, compromise on some, and write a bunch of it off. Of the $225,000, he predicts that they’ll end up with just shy of half. I suspect he’s being optimistic.
He wants to know how to collect the money. “How can I get more of it?” he pushes.
Sadly, this is a bad problem to have. And if you have it, you’re not alone. This plague makes SARS, MERS, and Ebola look like the common cold. (Too soon?)
The key—and this is the only way to solve this problem for the long term—is to stop accumulating receivables.
Collecting receivables is a nightmare. You extend credit. They fail to pay. You attempt to collect. They respond by:
- threatening to sue you for malpractice,
- declaring bankruptcy,
- threatening to file a grievance against you,
- threatening to trash you on Yelp, or
- sucking you into endless negotiation/discussion, costing you more and more time.
Sure, you can farm the task out to a collection agency and see how that goes. I’ve heard the occasional story of it going well. I’ve also heard nightmare stories where the agency and the law firm end up defending lawsuits brought as a result of the collection effort (apparently threatening their children is frowned upon).
There Is Only One Way to Avoid Receivables
The only way you’re going to avoid the receivables nightmare is to collect the fee before you do the work. Any other approach is going to result in receivables to some degree or another.
How do you collect the fee in advance?
You either:
- charge fixed fees paid in advance or
- require advance deposits to your trust account.
This isn’t complicated. You create a systematic approach to getting paid before the work gets done. You don’t start until you’re paid.
But, but, but….
I know, you’ve got reasons for working for free. But they’re crappy reasons. Just stop.
Here’s a system for collecting money in advance. You use it all the time. See the magic in it as we walk through it.
- You pull up to the pump.
- The sign says, “Insert credit card or pay with cash in advance.”
- You insert the card and it preauthorizes your payment, or you go inside and hand the dude $40.
- You pump the gas.
- When you hit $40, it stops or, if you paid by card, it keeps going.
That’s it. You pay in advance. It’s really difficult to get the gas (“petrol”—hello, rest of the world) without paying. It works.
You need a system that works like the one at the petrol station.
Now you’re blurting out something like, “But…our judges…our bar…our….”
Just stop. Turn it around. Put your energy into building the system. Find a way to be more like the gas station and less like the law firm with the nearly $250,000 in receivables.
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The $250,000 represents work that could have been skipped. That means more time with your family, your spouse, or your mistress (what’s the male equivalent?). Or it means money you would have collected in advance and used to pay for college tuition for kids, a home renovation, or gifts for your spouse or for your mistress (I still can’t think of a male equivalent).
Put energy into a creative solution to your problem. Don’t spend your time figuring out why you can’t solve the problem. Just go ahead and solve the problem.
I mentioned two solutions. My solution is fixed fees. You can do it by monitoring and controlling the trust account. You can certainly come up with an alternative to these two approaches. Or you can just use one of these.
How to Make a Trust Account Work
My experience with the trust account is that the most effective system involves hiring someone to manage the trust account payments and giving that person authority to:
- fire associates for failure to follow the rules,
- fire clients for failure to deposit required funds, or
- get in your face when you violate the rule.
The person to whom you delegate this responsibility needs to be unfeeling, number oriented, and ruthless. This person needs the capacity to kill anyone who gets between him or her and making sure you never work for a client who isn’t paying. This person needs to believe that pro bono work is something done on other planets. This person needs to be unstoppable, empowered, and untouchable. This person needs to run the money show, and you need to let this person do what’s required.
The “receivables” issue isn’t new. I’ve been hearing lawyers complain about it for as long as I’ve been talking to lawyers. It’s a problem some lawyers accept and do little, if anything, to solve. That’s crazy. The solution is right in front of us: don’t do work without getting paid.
Set a Payment Rule
We need a new rule for ourselves—a rule that we actually follow. We need to mean it when we say we’re not going to work without getting paid. We’re good with rules. We like rules. We follow rules.
You have a rule that says, “I won’t step in front of a bus speeding down the road.” You don’t break that rule. You don’t let it slide just once, not even when the bus really wants to hit you or when the bus has a super sympathetic situation. You don’t walk in front of the bus, right?
Why not adopt a new rule for yourself? Why not stop doing work for which you aren’t already paid?
It’s time for you to adopt your own approach. Create a rule and then stick to it. Then instead of complaining about receivables, you can spend your time complaining about your associates like the rest of us who’ve solved the receivables problem. We’re still miserable, but we’ve moved on to a different problem. Join us over here. Misery loves company.
