Billings & Collections Issues


Before 2008 there were a great many law firms that had little or no difficulty with their billings and collections. The bills went out and the payments (mostly) came back. For many firms who had clients of long standing the issues involving late payment difficulties had simply never arisen and the firm had never placed much emphasis on the processes involved in collections.

We all know how much attorneys’ lives changed in September of 2008. It’s a “before and after” world. Suddenly, accounts receivable became not just an issue but a big issue. A large number of law firms were caught completely flat footed. Many were (are) built around an end-of-the-year economic analysis and had never made much effort at collecting accounts before year end. Suddenly, they went to collect the accounts as usual and the cupboard was bare. Long-standing clients had trouble paying their bills and those who were not of that category simply could not afford services they had engendered when times were good. Law firms’ failures to monitor collections during the year as closely as they might have led to some of the disaster stories including dissolution and virtual implosion of which we have all been aware.

The real story of course in analyzing accounts receivable starts with client selection in the first place but even that took a back seat when so many businesses were unable to meet their cash requirements. The discussion here will center upon the need for a standardized policy for handling receivables at the beginning of the process (after billings have first been sent), not at the end. Also, divorcing receivables questions from the economic impact of an unpaid invoice for the moment, there are three issues which are of paramount concern from the stand point of professional liability and practice management:

  • An unpaid invoice may mean that a client is dissatisfied with the legal services.
  • An unpaid invoice which goes without any response indicates that the attorney in charge is having difficulty with client management.
  • An unpaid invoice indicates that the choice of representing the client in the first place may have been flawed.

Any of these may be the case with any unpaid invoice of over 45-60 days duration. Of course, it is true that there are exceptions where there are other circumstances as well, which may come into play (such as a late insurance company payment, a real estate closing, a probate and so forth).

The answer is to be more proactive; not to wait 60 or 90 days for client payment but to begin immediately to collect unpaid invoices and, as necessary, to couple  the attorney involved in the law practice side with a professional staffer (controller or accounting manager) working in tandem with (possibly) the finance committee added to the mix and to do this after only 45 days have passed. The theory propounded here is simply to allow lawyers to practice law and the administrative personnel to focus on collections. The sooner the issue is addressed with a non paying client the better the ultimate result will be for the law firm. If there is dissatisfaction with the bill, that can be resolved. If the client is unhappy, that can often be remedied. Certainly, it is better to know right away if there is a problem rather than to let months go without payment only to find out that billings must be written off as uncollectible, that a negotiation must be made for partial payment or find out that there is a professional liability claim waiting in the wings.

Here are some suggestions to help with the collections issue:

  • When a potential client first appears on the radar, a search should be made off of Westlaw™, or a similar site for each new client in order to determine whether they are able to afford the firm’s services (at least on paper). There are all sorts of other places to find information including a basic Google© search.
  • A retainer is a valuable method by which to determine the potential client’s means as well as their seriousness at undertaking the representation. It is the best way to protect the interest of the firm economically as well as to test the ability of a client to “pull the freight”. The amount of the retainer should be set by senior lawyers as part of the initial acceptance analysis.
  • A policy for work stoppage should be adopted. If a client has not paid an invoice after 45 days then the attorney involved should discontinue work on the file until the matter is addressed (assuming that they are able to do so). The controller, accounting manager or finance committee should be watching over this process and involving themselves in these decisions. It should not be left to the individual lawyer. They are often conflicted.
  • Collections should ensue for any amount that is owed. Setting the action-level at an “over this amount” ($5,000/£3048 for example) communicates to the client that the firm is unwilling to live by its own terms (which were hopefully set out in the initial client fee agreement). It’s good to remember, too, that the amount of the fee bill has nothing at all to do with the potential damages involved in an action against the firm for malpractice should matters go awry.
  •  Write-offs should be monitored closely and should not be approvable by the attorney involved in the services over a specified (and de minimis) amount.   Any write-off amount over that level or subsequent months of a similar amount each month should be duly noted by firm management. The individual attorney who wishes to make the write off should be required to explain their decision.  
  • Law suits for Fees are no longer really an option. Having to sue for fees is an admission of failure to manage the file and the client. The firm should adopt a policy which precludes such suits. A suit for fees will almost automatically acquire a counter claim for professional negligence which will in most cases cost the firm far more than if they simply wrote off the disputed amount.

Managing clients’ accounts is a requirement for any law firm both from an economic as well as a professional liability standpoint. If there is an early warning system in place to alert management as to the issues involved, the potential for a collection is greatly enhanced and the potential for difficulty greatly mitigated.