Poor collections processes can be the end of a small law firm. If you expect to be paid for the services you provide, you need to lay the ground rules in advance, and you need to vigorously manage your collections process. Period.

Typically, effective collections management is easier said than done for solo and small law firms that don’t have dedicated personnel to handle invoicing each month or the ability to follow up when bills aren’t paid.

There are a numerous factors that can contribute to poor collection practices, including fear of losing clients. But, being too slow to take action on past due accounts, or failing to act at all, can show the client that you’re not serious about payment.

Many law firms have no defined, documented policy for collections or fail to adhere to the policy they have. The longer bills go unpaid, the longer the odds of ever collecting.

Consider the present value of money and its decline over time. Every dollar of receivables declines over the time it remains outstanding (see the chart below). This can represent significant dollars to your firm.  So, don’t unwittingly discount your rate by allowing billables to go uncollected.

  1. Are you consistent? It starts with a regular statement. A law firm should send statements to clients each month.  Some firms will even send a statement if no work has been performed during that period simply to keep the client aware that nothing is due.  It also serves as a way to stay in touch and keep your firm on their mind.  The next step is to send a dunning letter after 45 or 60 days of non-payment. A dunning letter is a notification sent to a client that states payment is overdue. It will typically include the client’s name and the amount owed, and state that the debt will be considered valid if not disputed within a certain period of time. Dunning letters are typically sent after 60, 90, 120 and 180 days. They don’t have to be combative, but they do tend to become more demanding over time. By consistently sending statements and dunning letters to clients, you show that you will actively pursue these matters, and you create a paper trail that shows you’ve made every effort to collect what is owed.
  2.  What’s your policy? Every law firm, regardless of size, should have a formal collections procedure in place that clearly outlines what actions must be taken and when. You should also have document templates that can be customized for each client. Include your collections policy in your fee agreement so the client understands how they will be invoiced, how soon they will be expected to pay their bills, and how outstanding balances will be handled and pursued.
  3. When does it become bad debt? At some point, you may have to make the determination that outstanding balances are bad debt. Bad debt may be written off in your business tax returns, but you need to know the rules first. For example, if your firm operates on a cash basis it may not be allowed to write-off bad debt, but generally if it reports on an accrual basis it can. You also need to have a policy and process for determining when it becomes uncollectable. When collections do fail, don’t let poor collection practices cause you to miss the tax benefit of writing off bad debt.
  4. Should collections be a DIY project? Managing collections in-house can backfire if it creates gaps in your collections process or takes you away from strategic initiatives that can grow your firm. It can also place solo practitioners in the uncomfortable position of having to play an aggressive collections role with a client to the detriment of the relationship. Being one step removed from this process can be beneficial. Outsourcing these tasks is often more advantageous and cost-effective.

Don’t let poor collections undermine your Virtual Paralegal Services can develop and enforce a collections policy, send statements and dunning letters, make phone calls to clients when necessary, and manage bad debt. Contact us to help you manage your collections process and improve your firm’s cash flow.

Leave a Reply

Your email address will not be published. Required fields are marked *