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Seeing Is Believing When Managing Accounts Receivable the Right Way

Following a difficult 2020, the start of the new year is the right time to candidly assess what your firm is doing right in its approach to managing accounts receivable — and what needs to be improved on — in the coming year. Although law firms differ in size, practice areas, culture and management style, they all share the same priority: getting paid.

Jake Krocheski

Observing how firms have been managing their accounts receivable (AR) this year, we note key areas where firms are making progress and where they still need improvements:

Understanding you can’t collect yourselves out of receivable problems. Taking steps to collect aged receivables may help cash flow in the short term, but without fundamental changes, firms are learning that attorneys will return to bad habits. As a result, they’ll find themselves once again confronting aged receivables down the road. Legal organizations that are taking steps to successfully manage their accounts receivable are those that regularly review updated information on client payment status so they can act quickly. These firms are not just reading the numbers but also using reporting methods to look behind the numbers to learn why clients are not paying and what needs to be done to get paid as soon as possible. It’s as much practice management as it is financial management.

Confronting irrational fears about instituting an AR management program. Attorneys fear that managing receivables will hurt the client relationship, but we have learned that it will actually strengthen the relationship if it is handled professionally. In today’s up-and-down economy — and in the face of changing law firm economics — it has become a best practice to contact clients about unpaid bills sooner rather than later. Law firms are realizing that they lose clients by doing poor work or by failing to deliver client service, not by asking clients to pay their bills. Attorneys notice that clients are receptive to appropriate contact and that contacting them early in the aging process helps assure clients that their attorneys are engaged with their work.

Firm leaders need not only to be able to get attorneys to address collections, but also to understand when additional resources need to be employed to achieve results.

Not solely relying on history to judge how collections will perform going forward. It has always been helpful to gauge future collections based on experience. Although the past should not be ignored, in these times, firms see that it is less useful as a guide to current payment behavior. The economic climate is vastly different; mindsets have changed and so have business practices. Firms are becoming more realistic about whether they are underachieving in their collection goals and determining earlier whether their clients are having difficulty paying their bills.

Actions speaking louder than words. Firms are learning to stop discussing collection strategy endlessly with their attorneys and recognizing that there are times when it is most effective to tell them what needs to be done and timeframes by which collection efforts should be completed.

If your legal organization is still reluctant to make changes, consider the following:

Engage in AR management throughout the year to help achieve revenue goals. Effective receivables management starts from the top. Firm leaders need not only to be able to get attorneys to address collections, but also to understand when additional resources need to be employed to achieve results. They need to take stock of what the firm is doing — and why — and evaluate what is and is not working. Assess whether you have the right people, with the right skills, doing the right things that produce right results. Hold attorneys, staff and the entire management team to high standards of accountability to ensure progress is being made.

Roll up your sleeves to get results. Spend less time on creating and revising AR management rules that simply do not work or are too bureaucratic to manage. Focus instead on processes and procedures that will streamline payment results or identify why clients are not paying so you can resolve things as quickly as possible. Often firms permit their attorneys to extend too much professional courtesy, allowing them to make exceptions to the rules that result in clients delaying payment or not paying at all.

Recognize that clients know nothing will happen if they do not pay. Your firm is not the only one contacting clients for payment. Institute regular, steady, professional communication about unpaid bills to secure dates when payment can be expected and to help guide future follow-up. By showing your clients that the firm is regularly contacting them and monitoring their payment status, you let them know you are well aware of their bills and expect payment or need to know if payment will be delayed.

Understand that AR management and collections is a process, both during good and bad times. Even when the economy is healthy and all signs are pointing in the right direction, law firms are still faced with many complicated transactions and relationships that do not lend themselves to black-and-white payment terms. When times are bad, those complex transactions and relationships are still there — but they are magnified, resulting in even more difficult hurdles.