Paying Late Costs You More Than You Think

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Whenever I browse the web from this Airbnb in Bangkok, a message pops up on my screen.

“Your AIS Fibre Internet due date has passed. To check your balance and due date, please log on to your ‘my AIS’ app.”

Apparently my landlord isn’t paying his bills on time. Unfortunately, his current financial situation may impact his future financial situation. The same could happen to you.

The apartment is supposed to include access to the Internet and a pool. (The pool has been out of service since we got here. Please don’t mention the pool situation to my wife. It takes her 15 minutes to calm down.) The Internet is far more important to me than the pool (but keep that between us).

One day during our first week here, the Internet shut off for four hours. The owner paid the bill and the service was restored a short while later, but the interruption was disconcerting.

I suppose his bill-paying habits are irrelevant to our stay in his apartment, but this message popping up on my screen makes me wonder about his financial stability.

Knowing that our landlord is behind on his bills undermines our confidence in him. Does he forget to pay? Maybe his finances are a mess? Should we be concerned about anything else beyond the Internet?

Let’s face it: How you manage your money says a lot about you. It’s a common measuring stick, an important way we judge one another. It’s how we determine whether to trust someone to meet their obligations–financial or otherwise.

When we fail to pay our bills on time, people notice. They talk about us behind our backs, wondering about our situation.

Sometimes the reason we’re behind on our bills isn’t because we’re out of cash. There are many plausible explanations for a delinquent account, but failure to pay still makes people wonder.

They lose confidence in us. They gossip, which erodes trust.

Whether you’ve got $10 in your bank account or $10,000,000, you should behave in a way that shows financial responsibility. People won’t talk about the amount of cash you have, but they will talk about how you demonstrate maturity, reliability and trustworthiness.

People notice financial lapses. Don’t think we’re all too absorbed with our own issues to notice your struggles. We notice because it’s part of how we make judgements in a modern society.

The world changes quickly and our trust indicators evolve, but we still need to determine who to trust. Maybe something will replace human judgement at some point, but for now, we judge each other all day long.

I’m not a fan of worrying about other people’s thoughts. I try not to let their judgments drive my behavior. But trust is the currency of the legal profession. When you lose the trust of others, you’re lost.

Money, too, is all about trust. There’s no way people will trust you if you don’t live up to your financial promises.

Money, trust, and your reputation are all bound together and that’s not likely to change anytime soon.

Law firm partners judge their associates

I had two associates who clearly couldn’t manage their money. Both of them made me very nervous given that their work role required me to trust them to handle financial issues on behalf of our clients.

I never fully trusted either of them and they were never given responsibility without extra oversight.

How did I know they were financially out of control? The clues were obvious because our financial situations tend to leak out in different ways.

The fastest way people make it obvious they have a financial problem is when they panic about their paycheck.

Our firm deposits paychecks on the 5th and the 20th of each month. Usually the cash hits our employees’ accounts a couple days before. The funds for the 5th sometimes show up on the 4th or 3rd. Depending on weekends and/or holidays, the money might arrive earlier.

Some employees get stressed if the funds aren’t deposited early. They start pestering the bookkeeper about the cash, even when it’s not technically late. They’re clearly living paycheck-to-paycheck (or a few days shy of paycheck-to-paycheck).

Their questions to the bookkeeper don’t go unnoticed. People love financial gossip. Yes, they judge you, no matter how many times you blame your “student loans.”

Gossip and judgement may not be fair, but no one has sympathy for you because you had to borrow money to go to school. Sorry, that’s reality.

Another way people let on that they have financial problems is with reimbursements for expenses.

Associates sometimes need to spend money out of their own pocket and wait for reimbursement from the firm. It’s common for associates to advance funds for a client lunch, a hotel room at a continuing education program, or for vehicle expenses for traveling to meetings and court appearances.

Some associates submit their expenses and wait calmly for their reimbursement. Some pester the bookkeeper. Some go off the deep end and demand a cash advance before incurring the expense.

We once had an associate insist that the firm prepay a hotel room expense before the conference so that she didn’t have to cover the cost.

Expense panic is perceived for what it is–a very tight personal budget.

When you panic about routine expenses, you send a message that you’ve maxed out your credit card and you’re living beyond paycheck-to-paycheck. It says you’re living in the out-of-control debt zone.

Law firm partners aren’t always consciously aware of the factors they consider when they judge and assess their associates. They just do it.

They decide whom to trust based on all sorts of input. The ‘how they manage their money’ thing is part of a complicated human formula of assessment. Work product is just one part of the mix.

Other lawyers judge you

Does it surprise you that other lawyers gossip about you? Seriously? It shouldn’t, because you do it too. We’re a gossipy bunch. We talk incessantly.

I’ve heard all sorts of negative comments about the financial situations of other lawyers. Some comments are triggered when one lawyer sees judgements on public record books. Some are triggered when there’s a civil collection action against a firm. But most comments are triggered by more subtle behaviors that aren’t public record.

We talk about you when…

  • You hire another lawyer for a mediation or arbitration and you’re late on the bill.
  • Someone takes over one of your cases and the trust account balance/refund isn’t paid promptly.
  • A lawyer handles a payment from your law firm to their client and it takes a while.

I love chatting with lawyers. We’re good conversationalists and we’ve always got a good story.

Often, the subject of that story is another lawyer. Those stories determine whether we trust you enough to refer you. Those stories determine whether we suggest your firm when a young lawyer asks us where he might find a job. Those stories dominate our judgement-making process about you.

Your vendors judge you

Vendors talk about you too, and they’re often the first to know you’re running short on cash.

Vendors who roam around from lawyer to lawyer (the courier service people, the coffee service team, and the copier technicians) are the worst. They’re like a little cadre of spies working for the CIA. They know what’s up; who’s paying on time and who’s not. They hold on to information like a leaky bucket holds water.

If you don’t want vendors talking about your financial situation then you need to pay on time. You can’t change human nature, but you can avoid giving them fodder.

That isn’t to say the vendors who hop between offices deserve all the blame. Professionals who serve lawyers like to talk too.

The accountant who specializes in law firms may have a big mouth that gets extra verbal when he’s annoyed about your outstanding balance.

Your landlord is probably plugged into the lawyer universe, too, and landlords aren’t known for their compassion. They also talk.

Expert witnesses talk about their unpaid fees. Even bar association employees and courthouse clerks let slip when someone is late on a payment.

Face facts: When you don’t pay on time, the people whose services you consume aren’t happy. Like anyone else, they talk about the things that upset them. They just want their money.

Your employees judge you

Being late on payroll–just once–changes everything.

Your employees won’t leave immediately, but they’ll never trust you the way they did before you financially abandoned them. You’ll explain it, they’ll accept your story, but they’ll know in their hearts they can’t ever count on you again.

Employees feel the same way about reimbursements for expenses, but their reaction isn’t as dramatic. Being late once or twice is no big deal because the amounts are small, but dragging your feet on reimbursements still chips away at the relationship.

Employees who answer calls from collection agencies or open dunning notices in your mail get an unobstructed view of your sketchy financial practices.

When I was in law school, I briefly worked in a law office run by a lawyer whose car was seized by the IRS for non-payment. Did the employees talk about that event? You bet. Endlessly.

You can be absolutely certain that your team discusses your lack of cash. They worry you’ll miss payroll. They won’t discuss it for long, because soon they’ll leave. And they’ll answer honestly when they’re asked “Why are you leaving?” in their job interviews.

Your financial situation is no secret to your employees when they can’t log into your cloud-based tools (your file sharing repository or practice management system) because you didn’t pay your credit card and now it’s declined for new charges.

Your financial situation is no secret to your employees when you ask them to dodge a client who expects a refund. From their perspective, there’s nothing worse than being thrust into the role of helping your boss avoid financial obligations. Your employees try to pay their bills on time and wonder why you don’t do the same.

Oh, and you should assume the coffee guy, the courier, and the copier repair tech (and all the vendors who come into your office) will not-so-subtly alert your employees when bills are behind: they’ll ask when they can expect payment.

Your clients judge you

Your clients know when you’re tight on cash. They’re not stupid. They don’t buy your excuses.

I’ve overheard people in the moment they came to realize their lawyer was broke. They assumed the lawyer was flush with cash. Their realization is especially damaging to the lawyer’s reputation because they thought it was nearly impossible for a lawyer to do anything but pile up cash.

Clients may be on the outside of the courthouse rumor mill, but they figure things out.

They can tell when the lawyer calls to collect a fee. They can distinguish between someone politely reminding them about their invoice and someone calling out of fear and desperation.

When the lawyer quickly discounts the bill if the client will “pay right now,” the client understands.

When the lawyer nudges a prospective client to retain “right now,” the prospect detects the anxiety and distress. They can feel the lawyer’s financial stress.

Clients, more than anyone, judge you before, during, and after an engagement. They put their biggest problems in your hands. They monitor you for signs of confidence or uncertainty. They have their antenna up, and you are transmitting signals whether you know it or not.

It doesn’t matter why it happens

Sometimes, a failure to pay bills is the function of a poor system, or mere inattention. It’s not always the case that you’re out of cash. (Truthfully, however, a cash shortfall is usually the problem.)

If your problem is inattention, then pay attention! You’re paying more than late fees. You’re damaging your reputation. Delegate it, manage it, and keep it functioning.

If your problem is a reluctance to delegate the task due to financial privacy, then get over it.

Your people are definitely discussing your finances when the bills aren’t paid. You’d be better off having them discuss how you’re making a ton of money and greedily keeping it to yourself. It’s better to be greedy than a financial deadbeat.

If the problem is a lack of money, then stop spending what you don’t have. You likely need to fire some people. That’ll feel like a setback. Maybe it is, but it’s more important to be financially stable than to have more employees. Your reputation will suffer more if people think you’re financially unreliable than it will if you have fewer employees.

Stop the problem at the root: Spend less. Of course, generating more revenue will help solve the problem, but cutting spending is the key first step.

Here’s how I manage my bills

Most of what I’ve learned about managing my bills comes from hard-earned experience.

Amazingly, I’ve never been late on a payroll, but I’ve done the rest of the things I mentioned above.

I learned early, and often, how damaging financial mismanagement is in the world of lawyers. I can’t overstate the impact of poor money management on your reputation. It’s big. People care. They talk about it. The cumulative impact of financial rumors is significant.

Here are the lessons I learned and how I got my financial house in order:

1. Pay everything on time

Start paying on time. If you can’t find a way to make this happen–by cutting expenses, cutting staff, etc.–then your financial situation might be beyond repair. It might be time to look at options for discharging debts.

Pay everything now. If the problem is your system, design a new system. If the problem is a lack of funds, borrow some to get the problem under control.

2. Get a credit line

If you lack the funds to pay your bills, go to a lender and borrow what you must to get the overdue accounts under control. Borrow just enough to transition from being behind to being current on your accounts. Prioritize the situations most damaging to your reputation.

Lenders are surprisingly generous with lawyers. Don’t feel relieved when they loan you the money. You’ve stopped the reputation damage for the moment, but you’re still in deep debt.

3. Get rid of the credit line

Having a credit line gives you room to breathe, get bills caught up, deal with seasonality, and stop the reputation damage caused by non-payment. But a credit card is a Band-Aid, not a cure.

The business of law (with rare exceptions) generates a profit from the outset of an engagement. Most of us aren’t planting crops for harvest in the fall. Most of us aren’t working on speculation.

We’re working for fixed fees or billable hours that get paid this month. We do the work, we get paid, and we show a profit. It’s pretty simple.

When you borrow money, it’s usually because you’re losing money. Most lenders will grant a credit line to help you over some bumps in your road, but they don’t want to finance long-term growth.

If you need long-term financing for growth, get it through longer term loans, or better yet, by bootstrapping growth with profits from the business.

Credit lines are for temporary needs. If the business thrives, you’ll eventually be able to finance your temporary needs without an outside lender.

A credit line might make sense in limited circumstances. But most of the time, an outstanding balance is a sign of a law firm in trouble. From my experience (and observing others), credit lines are rarely paid down until the lender forces it.

If you have a crisis, use credit to solve the problem. Then close the account. You don’t need the temptation. You don’t need a bigger credit limit. Don’t lean on the crutch provided by lenders who are always willing to add more debt to your balance sheet. That’s just more rope with which to hang yourself.

4. Delegate it

Have someone else pay the bills. Get it out of your control. Yes, you’ll need to be sure there are funds in the operating account to cover whatever gets paid. But get rid of your discretion to speed up or slow down the payment process.

Create a well-documented system with rules for payment. Delegate it to someone and then get out of the way.

If you’re hesitant to trust someone inside your firm with your financial information, outsource it to an independent bookkeeper. If you hesitate to trust an independent bookkeeper with your financial information, get a mental health professional to give you some counseling.

Opening bills, reviewing invoices, and transmitting payments is not the best use of your time. Separate yourself from the day-to-day of making payments and let a bookkeeper handle it. That’ll keep you from paying late and force you to focus on keeping enough in your account to make those payments.

5. Pay your bills quickly

Some financial gurus will argue that you ought to pay your bills at the last minute to take advantage of “the float.”

Ignore those people. Pay your bills quickly.

Most of us run cash businesses. The simplest way to keep up with your business is to pay for everything quickly and move on. You don’t need a complicated system for handling payables if you simply pay the bills and leave nothing outstanding.

Keep it simple. Have the bookkeeper open the invoices, review for accuracy, and issue payment. To make things even simpler, you can probably set up most of your invoices for automatic payment.

By paying your bills as they arrive, you keep your finances simple, you avoid the risk of late payment, and you keep your reputation intact.

I have tried lots of different financial management approaches. I always wanted a fancy, sophisticated financial management system. It took a long time for me to learn that paying quickly would keep me out of trouble. It’s the best system of all.

Paying on time builds trust. Paying late…

Logically, my landlord’s bill-paying habits shouldn’t make me wonder about anything other than his finances. But the message that keeps popping up on my screen makes me worry.

Is this place really clean?

Are all his claims about the apartment true?

Will someone help us if the air-conditioning breaks down?

Should I trust his recommendations for restaurants and attractions?

I know I shouldn’t worry, but I do because I’ve lost confidence.

Soon I’ll write a recommendation on Airbnb. Like the rest of us, my landlord lives in a world where client/customer reviews matter more than all of the rest of our marketing combined.

Will the dunning message on my screen change the words I enter when I’m on the Airbnb screen? Will he get five stars or fewer? Will his finances impact his finances?

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