Law firms may be surprised to learn that their main problems with collections and accounts receivable don’t have to do with financial management. In reality, it has to do with practice management, which means that attorneys and the financial management team need to be more proactive in dealing with accounts receivables and client financing. No matter how large a firm is, it will still be in jeopardy until it fixes these ten biggest mistakes in managing accounts receivable.
1. Not Recognizing Collections Problems Early On
One of the most common mistakes that law firm accounts receivable department makes is not recognizing collections problems early on. Because law firm clients typically accumulate thousands of dollars in fees, assumptions are sometimes made about the client’s ability to pay. This is especially the case if the first few bills were made in a timely manner. A pattern was established where the client was a good payer. However, as soon as a bill becomes 90 days delinquent, that’s actually the first indicator that there’s a collection problem.
2. Being Afraid to Damage the Relationship
Many law firm partners may have personal or long-standing relationships with their clients. And of course higher fees clients bring in a substantial amount of money into the firm. Too often, the accounts receivable department is too afraid of damaging the attorney-client relationship to demand payment. In actuality, it’s the client that is damaging the relationship by disregarding due dates. In reality, many clients are so high up in their own organization that they may be unaware of delinquent bills. A polite phone call or email is often all that’s needed to rectify the situation in a way that keeps the relationship intact.
3. Relying on Paper Delivery Methods
Ironically, law firms accounts receivable departments are often mired in the old ways of doing things. One of the ten biggest mistakes that law firms makes in managing their accounts receivable is relying on paper reminder letters and billing statements. These hard paper items are too easily misplaced or ignored, especially when the recipient is an upper level executive. Instead, law firms would do well to send payment reminders via email or a phone call. The email can be set so that the law firm will know if and when it’s been opened. Phone calls of course can always be placed so they go to the right person.
4. Not Fully Utilizing Accounting Software
Another mistake laws firms make is not fully taking advantage of everything their accounting software can do for their accounts receivables. For instance, some accounting software can automatically be set to trigger notices to clients when accounts receivables gets above a certain number or when the account becomes a certain number of days overdue. What often happens is that the law firm is so focused on making every hour billable that the staff never take the unbillable administrative hours necessary to become fully proficient with the accounting software.
5. Accepting Alternative Payment Structures Too Readily
In an eagerness to sign a new client or appease an older client, law firms may end up embracing a non-traditional payment arrangement that they really shouldn’t. Whenever a payment structure goes outside the box, it becomes that much harder to keep track of when payments are due. The more of these a law firm has, the more likely it is that the accounts receivable department will inadvertently let something slip through the cracks. That’s when receivables can get completely out of control.
6. Failing to Stop Work Soon Enough
Another mistake law firms make is when to stop throwing good money after bad. Unfortunately, it’s a crescendo of errors. If a client has stopped paying, but the firm doesn’t recognize it as a problem, the firm will likely just continue to do work for the client. Meanwhile, bills aren’t being paid. Simultaneously, hours that the firm could have billed for actual paying clients get wasted on the client who isn’t paying. This is a cash flow catastrophe in the making.
7. The Reports Aren’t Answering Key Questions
Obviously, law firms churn out a massive amount of reports on a daily, weekly and monthly basis. But in many cases, the errors lie in the missing data. Often, accounts receivable reports aren’t providing the correct information to measure cash flow and determine where weaknesses are. What is the payment history for each client? Is there a history of paying late? These things can be powerful identifiers that could prevent the law firm from making similar mistakes again and again.
8. Not Analyzing the Right Data Reports
In too many instances, law firms are failing to analyze the right data reports necessary to manage their accounts receivables. Often, the oldest and largest firms are guilty of using generic reports that tell too much general information and not enough specifics. As an example, the law firm should be able to look at a report and know exactly which accounts are in arrears, how long the debt’s been outstanding, and what steps have been taken to pursue payment. Only then can the firm avoid the other mistakes listed here.
9. Ignoring Older Receivables
Ironically, the more a law firm is focused on bringing in more clients, the more old receivables tend to be ignored. The older a receivable is, the harder it is to collect payment. When too many years go by, the firm may even simply give up and charge off the debt, meaning they’ll never get paid.
10. Failing to Hold Collections Staff Accountable
Finally, one of the biggest mistakes is not holding collections staff accountable for getting the work done. Employee motivation is key in all departments, but in the collection department, there has to be some accountability for not performing. If the job is to collect payment, then a payment needs to be made. Otherwise, there should be repercussions.
When you take the time to consider these ten biggest mistakes, it becomes clear that accounts receivable needs to be a forefront priority in the law firm. In this way, law firms can be proactive and successful in managing accounts receivables.