Failure to collect expenses incurred on behalf of clients can be the difference between a case earning a profit or incurring a loss.
Profit margins, in the practice of family law, are slim – that’s a fact. When you aren’t making much money on a file, and you fail to collect a significant client expense, you create a situation where you might have been better off never having taken the case.
Lets look at a typical situation. You handle a case for $6,000 (either as a fixed fee or in hourly billings). Lets assume you collect the entire $6,000 (and we all know that would be a great subject for another post). That $6,000 gets doled out in payroll to staff and lawyers, marketing costs and other overhead.
If you did the work yourself, rather than delegating it to an employee, you should also factor in the reasonable cost of having the work done (your salary).
What’s left is usually somewhere between 5 and 20 percent which is what some would call “profit” (your compensation as an owner). If all goes well you’re left with between $300 and $1,200 in profit.
Lets assume that during the course of this $6,000 case (maybe it’s an action to enforce a provision of a child support order) that you took two depositions and briefly used the services of a forensic accountant. The total client expense might add up to $1,800 and possibly much more.
You bill the client for the $1,800. The bill is sent near the end of the case because that’s when you receive the bills from the court reporter and accountant. Unfortunately, the client doesn’t need to stay in your good graces now since the case is over. Hopefully, things went well. If they didn’t the situation will be even worse.
The client now has other bills, other priorities and your invoice goes to the bottom of their pile. You call the client and request payment. Your mailbox remains empty. You call again. Again, no payment. Finally, in a desperate attempt to collect the bill you agree to a compromise. The client sends you $900. You send the vendors the $1,800 they are owed.
Now, our profit of, maybe, $1,000 becomes a profit of $100 or, potentially, a loss. Not good.
How do you solve the problem? We’ve tried a bunch of different approaches. We’ve tried to get the vendors to contract directly with the client and bill them. We’ve tried having the client pre-authorize a charge on their credit card. We’ve tried asking the client to pay the vendor in advance. Now, we ask the client to place a deposit in our trust account in the amount we estimate the vendor will charge.
Does it work? Sometimes. Our biggest problem is getting our attorneys to remember to request the funds. Another problem is properly estimating the expense. We’re still struggling.
Recently, we adopted a policy of insisting that the attorney collect the deposit or risk having the unpaid expense deducted from their paycheck. Thus far we haven’t had to enforce the policy but that day may be coming. I dread that possibility.
It’s a difficult situation and it’s important that we be proactive in managing these costs before our profit turns into a loss. I’m still searching for ideas that work. Got any?
