October 23, 2012

Keeping Your Practice Out of the Hole: Finance Tips

Law Practice Magazine Logo

 Table of Contents | Features | Frontlines | Technology | Business

June 2009 Issue | Volume 35 Number 4 | Page 55


Keeping Your Practice Out of the Hole: Finance Tips

From screening policies to collection strategies, here are tips for getting your finances on more solid ground.

What’s the first rule of holes? When you’re in one, stop digging! Translating this to your firm’s bottom line, you need to make sure that you aren’t inadvertently shoveling yourself under in this down economy. Fortunately, there are steps you can take immediately to get your finances on more solid ground.

In the previous three installments of this column, we discussed management, marketing and technology tips that you can use to shore up your bottom line in these tough economic times. Now we’d like to get back to some of the basic financial tools that you can use today to pave the way to a brighter financial picture tomorrow.

Starting at the Beginning: Screening New Matters

The most important thing you can do now to collect your bills later is to immediately start screening your cases more carefully. This probably seems obvious, but you do not want to take on clients who can’t pay the freight. Unfortunately, a lot of lawyers are overlooking this shockingly simple truth in these rough economic times.

Since many people with legal problems are reluctant to spend the money to hire a lawyer right now, calls to the office could be falling off. The instinct of many lawyers is to panic and accept clients or matters that they wouldn’t normally take in better times. But that is not the way to go.

Instead, go back to the drawing board and rethink the types of matters you will accept and the criteria those matters must meet before you will agree to take them. If you need to let your standards slip a little to make short-term ends meet, do so. However, make sure that you know where the outside edges of those new parameters are. Then make sure everyone in the firm is on board with those parameters and adheres to them through a system for vetting new clients and matters before an attorney-client relationship, and a less-than-profitable financial relationship, can be formed.

The cases that you take right now, and your ability to collect the fees that will be owed for the work done in the near future, will generate the cash flow that leads you out of hard times. If from this point forward you pick the right matters and give great service to your clients, things will continue to get better over time as you (1) get paid for the work you do and (2) pick up more good clients through referrals from the satisfied clients you are currently developing. As Stephen R. Covey says, “Begin with the end in mind”—and the end, for your purposes, is ensuring that you will be paid.

Looking Forward: Formalizing Credit Extension Policies

Many firms lack formal policies for extending credit to clients, even though extending credit is exactly what firms do when they perform work before receiving payment. Accordingly, you should carefully decide on the retainer requirements for each type of matter you handle and, to ensure things are clear to potential clients at the outset, rehearse the “script” you will use when explaining these requirements to them. The more you practice it, the more comfortable you’ll feel delivering it—and the less likely potential clients will be to try to negotiate the requirements away. Explain your deposit policy in your fee agreement, so clients are fully aware of your expectations, and have clients sign a copy indicating their acceptance of the terms.

Again, make sure everyone in the firm understands the requirements to ensure that they’ll be strictly observed. Then put procedures in place to constantly monitor the funds held in trust against the work yet to be completed (see if your accounting system can print out trust balances), and request smaller, more frequent replenishments that the client can reasonably afford. Never allow the retainer to dip lower than an amount that will cover at least the next 30 days of anticipated work without calling the client in to discuss the situation. Be prepared to cut a client loose immediately for noncompliance with your fee-replenishment policies. It’s the only way to keep yourself out of the trap of waiting until it’s too late to ethically withdraw should you find yourself working without being paid.

If you feel that you really must continue to perform certain types of work without collecting a cost-andfee deposit, revamp your client intake process to obtain information that will help you better judge the creditworthiness of potential clients. Go ahead and find out if individuals rent or own. Find out how long they have been at their jobs and how much they make. Determine the level of debt they’re carrying and whether payment on that debt is current or past due. Credit reports are now a business necessity.

Most lawyers don’t want to seem like the client’s bank account is their chief concern—nor should it be. Nevertheless, it’s your responsibility to bring up how much it will cost clients to achieve their legal objectives—and to talk frankly with them about whether they can, or should,

pursue a particular legal matter given what it will cost. Try role-playing with a colleague until you are comfortable discussing your fees and costs in a way that helps clients weigh their choices. In these economic times, you should be placing more, rather than less, emphasis on the cost of your services.

Looking Back: Collecting Existing A/R

Now let’s look at a few things you can do to bring in at least a portion of the uncollected accounts that you are now owed for work already done.

First, focus on collections. When times are good and bills are more often paid than not, law firms tend to let collections run on autopilot. Sadly, this is quite often when planes crash. Someone in the firm must be in charge of monitoring and collecting accounts receivable, and that person must be compensated for doing this important job. After all, it doesn’t matter how much work the firms’ lawyers are pushing into the pipeline if none of it translates into money coming out the other end. From this point forward, no account should go more than 30 days without a payment.

The person responsible for collection of accounts receivable should contact each client with a past-due balance; politely determine why the account has not been paid; and attempt to work out either a payment schedule or, when necessary, a write-down to immediately liquidate the account. Remember, time is money. So even if the firm has to take 50 cents on the dollar for a seriously past-due account, it is still better to get something now as opposed to a little more—or maybe nothing—later. It’s also better than leaving essentially uncollectible accounts on the books. The firm will receive immediate cash flow and also clean up its books, resulting in a better ability to evaluate its true financial position.

For clients who cannot pay off their unpaid balances through a compromise, consider instituting interest charges. There are a couple of approaches to this. First, you might set an interest rate that is higher than your cost of credit (for example, the rate that you pay on your line of credit) and make repayment arrangements with clients that will result in part of your profit coming from your legal work and another part coming from lending clients money. But beware: You must carefully judge clients’ creditworthiness (a task most lawyers are not trained in) and this may subject you to various lending laws. Be sure to check your jurisdiction’s ethics rules, as some do not allow imposing interest charges unless it was included in the original fee agreement.

The other approach is to check your jurisdiction’s usury laws to see if you can charge rates that are high enough to encourage clients to seek other sources of financing, such as moving their past-due balances to a credit card. And if you do not accept electronic credit card payments, start doing so immediately. There is nothing more foolish in difficult economic times than being unable to accept a payment that a client is ready, willing and able to make. Many bar associations offer discount programs to reduce the cost of processing, and there are providers that specialize in processing electronic payments for professionals. Accepting credit cards not only helps ensure payment, it also moves the task of collection to the credit card company. Make sure you understand your jurisdiction’s rules for accepting and handling such payments before getting started.

Looking Out: Keeping Your Eye on the Cookie Jar

In tough economic times, it’s also necessary to watch your bottom line in a way that you may not be accustomed to doing. We’re talking about the need for a heightened awareness of potential financial malfeasance within the firm. The fact is that desperate times sometimes lead to desperate measures, and an employee under serious financial stress may contemplate stepping over the line to use firm resources to relieve personal cash flow problems.

This is why it’s more important than ever to have adequate checks in place to lessen the temptation for employees and protect the firm from fraud and embezzlement. If you don’t have systems in place to protect your bank accounts, such as division of responsibilities in check writing and statement balancing, now is the time to institute them. (For more, read “Thinking About the Unthinkable” in this issue.)

Be sure to stay tuned for our next installment, when we’ll provide you with a fresh batch of tips before moving on to tie it all together.

About the Authors

David J. Bilinsky is a practice management consultant who focuses on enhancing law firm strategy, finance and technology initiatives.

Laura A. Calloway is Director of the Alabama State Bar’s Practice Management Assistance Program.