Do you have a debtor problem? Most partners and directors of law firms would say they don’t, because most debtors do pay – eventually. However, the average time for payment to Australian law firms is generally four times slower than their terms of trade provide.
So how did this come to be?
Most of us know the theory of debtor management: calculate debtor days, measure cash flow cycles and develop an escalation strategy.
That’s the easy part.
What most practitioners struggle with is the psychology of debtor management – the relationship tension that comes from chasing a client for your money. Most lawyers react to slow payment with apathy, resignation and acceptance, because it’s simply not in their nature to demand payment.
But things are changing.
As traditional margins come under pressure, every aspect of running a professional service is in the spotlight, including debtor processes. The very best firms are using all seven steps detailed below – the result is fewer debtors, more money in the bank and less hassle.
Seven steps to better debtors
1. Agreeing your Terms of Trade
Terms of trade establish your legal relationship with your debtor. Get them right and you’ll be well prepared to manage slow payers – trust me, there are plenty out there.
Please invest time to ensure your terms protect you and give you every chance to get paid. They should be clearly referenced on your engagement letters, website, invoices and more. Most importantly, ensure they include the additional costs of collection outside of agreed payment terms.
2. Credit Assessment – Initial & Ongoing
Before you start work, ensure you know who you’re giving credit to. Review their credit history to ensure they don’t still owe money to their last lawyer. When that great new client turns out to be a dud, you’ll regret not investing a few dollars to check.
Individual’s credit ratings change over time – even more so with a business. If you have an ongoing relationship, it is important to continually credit check your customers. By using credit monitoring services, you won’t be the last to find out when things change for the worst.
3. Payment Options
Generally, clients want to pay you. You should make it as easy as possible by providing multiple payment options
As a minimum, law firms should offer cash, cheque, credit card, direct credit and fee funding as payment options.
Fee funding is a service that provides a monthly payment option for your clients, while your firm gets paid both in full and in advance. This will ensure you avoid becoming an unofficial bank for slow paying debtors.
4. Prompt Communication
When you don’t get paid within your terms, don’t wait another month before contacting your client for explanation and payment. A quick courtesy call a few days after the due date is essential.
Clients with minor issues will often wait for you to call – if you don’t, it can exacerbate their issues. By the time you do follow up they may have spent the funds earmarked for your account.
5. Planned Escalation
Sometimes, even when you’ve taken every possible measure, clients will default completely.
Work out in advance how you will escalate recovery and respond to different scenarios. This means having prepared scripts and processes to your most common issues.
When your clients ask, “Can I pay you when I get paid?” The most powerful phrase you can use is, “Under those circumstances we X Y Z”, in accordance to the processes you’ve set out.
This phrase acknowledges the issue, establishes you are in charge, and sets the agenda for what happens next
6. Follow Through
If you threaten a debtor with consequences but don’t follow through, they will take advantage.
You should always be in control, know your options and implement consequences. This doesn’t mean you go straight to debt collection. Instead, if a client promises to pay next week, the consequence is simply a call with a little more tension on the relationship.
7. Resource or Outsource?
If you choose to manage your credit policy and accounts receivable in-house, then make sure that you have adequate:
People – Are they trained and enthusiastic to do the job?
Time – Is the job a priority or squeezed in between other duties?
Tools – Do you have tools to efficiently manage debtor workflow?
Skill – Does your team know your legal collection rights and responsibilities?
If not, you should consider either training and resourcing your existing team or investigating outsourcing accounts receivable. While accounts receivable is important, it is almost never a core function for a professional services firm. It needs to be done well, but not always by you.
For more information on fee funding, visit Feelink.
For more information on outsourcing, visit SmartAR.