I don’t think about receivables much if left to my own devices. Our clients generally don’t owe us money. At most, our receivables amount to a few thousand dollars when we forget to collect a deposit for a court reporter or an expert witness. Otherwise, our clients pay in advance. We are a 100% fixed fee practice.
Receivables are, however, a serious fact of life for many of the practices I’ve been talking to lately. Receivables easily add up to a few hundred thousand dollars per attorney in many firms, and the collection rates are abysmal.
If this is happening to you, it’s time to put it to an end. You’ve got to get paid—period. Leaving payment for later and then failing to collect is not a viable business model. It doesn’t work. It’s a terrible idea.
Here’s the way I look at it.
Let’s say I’m billing at $300 per hour, and I’ve got $30,000 in receivables that I’m going to write down or off or whatever you call it when you’re not getting the money. That means I worked 100 hours for which I’m not getting paid. Realistically, I probably worked more like 130 hours since we’re not very good at recording our hours, and we often don’t bill for things we think aren’t billable (like thinking about someone’s case while I’m in the shower—when I could have just been singing a Black Eyed Peas song).
That 130 hours translates into two or three weeks of extra vacation I could have taken while remaining in the same overall financial position. I could have used that time to float around in the Caribbean, or (if I were a nice person) I could have donated that time to a charity.
Instead, I spent that 130 hours helping someone who decided that I wasn’t worth paying. I inadvertently donated my time to someone who really didn’t care about me or my family. That doesn’t feel right to me.
How do you avoid receivables that don’t get collected?
Simple: stop extending credit. Just don’t do it.
Ask for money in advance. Figure out what the rules are in your jurisdiction and follow them. Put the money in trust or whatever is required, and make sure you’ve got your hands on the money before you do the work.
Okay, okay, okay—I can hear you screaming at me, “I already know that.”
I’ve been given the “I already know that” line repeatedly by people who also have hundreds of thousands of dollars in receivables (mostly over 90 days, which means they’ll never be collected).
Yes, you already know it, but you aren’t doing it. When push comes to shove, you’re extending credit. You’re finding yourself in situations where you feel obligated to extend credit or—and this is worse—you’re extending credit without knowing you’re doing it.
I’d suggest you move the process of replenishing your trust deposits to the top of your list of priorities. Deal with it constantly. Don’t relegate it to the back burner and attend to it only monthly. Don’t allow yourself or others to work on matters that don’t have money in trust. Fix your billing system so that it immediately alerts you if you’re billing to a matter that is unfunded. Have someone monitor these situations daily and provide you with updates.
Most importantly, don’t avoid collecting the deposits. Don’t send a bill and hope it gets paid. Collect the money yourself if your current system isn’t working. Get on the phone and ask for the money. I understand why you might not want to make those calls. For some, it’s challenging. But remember, it’s a choice between doing what you want with your time and having someone take your time away from you. Use that beach vacation to motivate yourself.
If all is well on the receivables front, then leave it as is.
If the system is broken, then (1) make yourself aware—daily—of the account status for every client, (2) stop working on matters that aren’t funded, and (3) get on the phone and collect the money.
There’s no reason for you to do good work and not get paid. That just isn’t right.