Focus on collections to increase financial health and reduce risks

By Thomas Berman, Principal, Berman & Associates

Managing clients’ accounts is a requirement for any law firm, both from an economic as well as a professional liability standpoint. If there is an early warning system in place to alert management to the issues involved, the potential for a collection is greatly enhanced and the potential for difficulty greatly mitigated.

Clearly, law firms need to have a standardised policy for handling receivables at the beginning of the process (after billings have first been sent), not at the end.

Divorcing receivable questions from the economic impact of an unpaid invoice for the moment, there are three issues which are of paramount concern from the standpoint of professional liability and practice management:

1. an unpaid invoice may mean that a client is dissatisfied with the legal services rendered;

2. an unpaid invoice which goes without any response indicates that the attorney in charge is having difficulty with client management; and

3. an unpaid invoice indicates that the choice of representing the client in the first place may have been flawed.

Any of these may be the case with an unpaid invoice of over 45-60 days’ duration. Of course, there are exceptions (such as a late insurance company payment or a probate).

The answer is to be more proactive and not wait 60 or 90 days for client payment. Instead, after 45 days have passed, begin to collect unpaid invoices. As necessary, couple the attorney involved with a professional staffer (controller or accounting manager) who works in tandem with (possibly) the finance committee.

The theory propounded here is to allow lawyers to practice law and the administrative personnel to focus on collections. The sooner the issue is addressed with a non-paying client, the better the ultimate result will be for the law firm. If there is dissatisfaction with the bill, it can be resolved. If the client is unhappy, this can often be remedied.

It is better to know right away if there is a problem rather than to let months go by without payment, only to find out that billings must be written off as uncollectible, that a negotiation must be made for partial payment or to find out that there is a professional liability claim waiting in the wings.

Tackling collections

Here are some suggestions to help with the collections issue.

• When a potential client first appears on the radar, look it up on Westlaw, Intellius.com or a similar website, in order to determine whether it is able to afford the firm’s services (at least on paper).

• A retainer is a valuable method by which to determine the potential client’s means, as well as its seriousness in undertaking the representation. The amount of the retainer should be set by senior lawyers as part of the initial acceptance analysis.

• A policy for work stoppage should be adopted. If a client has not paid an invoice after 45 days, then the attorney involved should discontinue work on the file until the matter is addressed (assuming that he is able to do so). The controller, accounting manager or finance committee should be watching over this process and involving themselves in these decisions. It should not be left to the individual lawyer, who is often conflicted.

• Collections should ensue for any amount that is owed. Setting the action level at an ‘over this amount’ communicates to the client that the firm is unwilling to live by its own terms (which were hopefully set out in the initial client fee agreement). 

• Write-offs should be monitored closely and should not be approvable by the attorney involved in the services over a specified (and minimal) amount. Any write-off amount over that level or of a similar amount in subsequent months should be duly noted by firm management.

• Lawsuits for fees are no longer really an option. Having to sue for fees is an admission of failure to manage the file and the client. The firm should adopt a policy which precludes such suits. A suit for fees will almost automatically acquire a counter claim for professional negligence, which will in most cases cost the firm far more than if it simply wrote off the disputed amount.

tberman@bermanassociates.net