When it comes to managing accounts receivables (AR), your firm, like many others, may have one foot in and one foot out of the water. It has not wholly committed to jumping in. You may be cutting corners without fully embracing all the accounts receivable management efforts you should.
Too often, firms get to December 31 and breathe a sigh of relief that they made it to year-end safely. Yes, they may have made budget, but they probably left too many unpaid receivables on the table, which will continue to age and become increasingly difficult to collect. They choose to ignore the amount they have failed to collect during the year so they could perform better.
Throughout the year, it is essential to evaluate how your firm can better manage and collect its receivables. While the year is still young, we can recommend five steps to help you fully commit to managing your receivables in order to improve your firm’s bottom line.
Stop throwing spaghetti against the wall to see what sticks! Take appropriate steps to build a program to manage AR all the way until invoices are paid in full. Manage it all year long; do not wait until the last month of the year to pay attention.
Too often, firms want the results of a strong accounts receivable management program without putting in the time and effort needed to make it happen. Recognize that the collection process is long, sometimes tedious and requires daily attention. You need to have a plan of attack, clear expectations and assignment of responsibilities, and ramifications if those involved in the process do not take ownership of their responsibilities.
Many firms give their attorneys too much control over collecting receivables from clients without making sure that the attorneys are spending the necessary time to collect their aging AR. The culture of forgiveness needs to be replaced with a culture of high expectations to increase revenue through better collection efforts throughout the year — not just in the year-end sprint.
Identify attorneys who need help getting paid, practice areas that need consistent AR management support and problem clients who don’t pay on time. If attorneys cannot make the time to monitor payment status, the firm must have AR professionals to do it for them. Attorneys are vital to assess the clients’ ability and inclination to pay, but they do not have to be the ones getting them to do so.
Too many law firms continue to think collections is an easy process — all you have to do is remind clients to pay and they will. In reality, firms must stop tolerating “good clients” who just don’t pay their bills throughout the year.
Receivables must be actively pursued until they are paid or determined to be uncollectable. And don’t kid yourself into thinking that older receivables are going to be paid without effort.
Although waiting until the end of year may work for some institutional clients, that’s not a workable standard for many others, which will require much more effort year-round. Be realistic about whether the firm is underachieving in its collection efforts and assess whether the firm has developed bad collection habits. Taking a hard look at the firm (and its attorneys) can put it on the right path to improving cash flow and profitability.
Receivables must be actively pursued until they are paid or determined to be uncollectable. And don’t kid yourself into thinking that older receivables are going to be paid without effort. There must be dedicated, consistent efforts — with status reports going to the management of the firm — to ensure progress is being made. Appropriate follow-up efforts are key to resolving these types of accounts.
While past performance should not be ignored, it may not be useful for predicting if your firm will have a successful year. Use AR reports to give firm leadership real, actionable information about whether collection activity is moving forward on each aging account. Detailed analysis should provide information on whether accounts are actively being pursued, what the payment status is, who is pursuing collections, what success they are having, why clients are not paying, and what steps are being taken to get them to pay.