Do you have an accounts receivable problem?

Law firm accounts receivablesRunning a law firm costs a lot of money. From paying employees, rent, yourself, the cost of office supplies, utilities, insurance, taxes and other miscellaneous expenses, it is not easy for most law firms. This is why some attorneys choose not to tangle with owning a law firm — and instead work for others as an associate.

If you are able to fine-tune your intake process, advertising and are able to maximize referrals sources to where you get clients coming into your firm, another problem can rear its ugly head. That problem comes in the form of accounts receivables.

In other words, you and your law firm employees are providing quality legal work to those in need. You are doing the very best you can to provide competent, communicative and diligent legal representation to your firm’s clients.

But the reality is that many of these clients are not reciprocating by timely paying their invoices.  In some instances, some clients might try to escape without ever paying. Accounts receivables can really add up over time.

Accounts receivable problem can hurt a lot of law firms. It can result in some law firms not being able to pay their obligations. Or, it some instances, it can result one employees not getting paid what they want. This can result in turnover as some employees depart the firm for what they view as greener pastures. It can also result in the law firm owners not getting paid well for all the hassles and stress that come with owning a law firm.

What’s the solution to the accounts receivables’ problem?  This is a question many law firm owners ask.  Below as some suggestions:

1.) Never forget that having a lower number of high paying clients almost always is preferred to having a higher number of clients that do not pay. After all, if you are performing quality legal work, and burning the midnight oil at the office to try to make these client’s life better, you do deserve to be compensated for your for what you are doing. Attorneys should be able to help clients and get paid for doing so at the same time.

2.) Create a standard rate schedule.  Create this schedule by looking at the type of case, the complexity and in consideration of the time and effort the case is likely to take. Then, do not negotiate down from your standard rate schedule.  If the potential client does not have the funds that you charge, it’s almost always better to pass on the case. Otherwise, the case is likely to end up with a large balance owed at the end that will be unpaid.

3.) You might want to consider raising your rates and initial deposits/advanced fees. Attorneys can and should help clients in their time and need. Attorneys also want to set their rates at a level that is fair and reasonable based on their experience level, the locality and the type of case. But if an attorney is lowering their rates (beyond where they should be) just to get new business, it can create an accounts receivable problem on that back-end that can really snowball.

4.) Instead of allowing clients to run a big negative balance, and expecting that they will pay that balance off on the back-end, consider having that client maintain a positive trust account balance while the case is pending as security for future work that is to be performed. Then, when that balance is down to zero, ask that they replenish that balance while the case is pending. This helps ensure that accounts receivables are kept to a minimum.

5.)If you have an upcoming trial in a case where you bill hourly, ask for a trial deposit before the trial. Preparation for a trial can take substantial time and effort. Trials can oftentimes take longer than what was originally anticipated as well. So, try to estimate the amount of time the trial is going to take and ask for a trial deposit in plenty of time in advance of the trial.

6.) You have to pay attention to accounts receivable and measure it somehow. Do you have practice management software where you can regularly track accounts receivable? Are you sending bills out regularly (at least once a month, if not twice a month)?  If you pay attention to it, make it a priority, and take appropriate action, you can prevent accounts receivable from spilling out of control. On the other hand, if you do not, you can really get in the hole. This is hole lawyers and law firms can end up with huge financial problems that can result in falling behind on bill payments that can ultimately result in the law firm failing. If you have signed personal guarantees for law firm obligations, like rent, it can get a law firm owner into serious financial problems.

Of course, if you get your accounts receivables problem under control, a lot of the pressure in owning a law firm can be relieved. You can rest easy knowing that your law firm is on firm financial footing. You can ensure that payroll is met, taxes are paid and that you have the funds to pay your bills and even allocate some funds to marketing.

This can allow you to do other great things to help the community. For example, you will have the ability at that point to donate some pro bono time to worthy clients in need. You may have the extra funds to donate to a pro bono legal services agency that provides services to those in need — or another charitable cause. You can even donate some time to teach a continuing legal education seminar to help educate other legal professionals.

However, if the accounts receivable are out of control, it’s hard to do any of this when you are just trying to keep your head above water. This can result in stress, anxiety and, in some instances, a law firm that cannot survive — and a law firm owner in deep financial trouble. Thus, you have to develop a system of some kind to keep accounts receivables to a minimum.

If you have any thoughts, feel free to share them below.

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