Collections is the best policy

Edward Poll, The Daily Record Newswire

Overdue accounts — they’re bound to happen. And the longer you wait, the harder they will be to collect. Because of this, you need a formal, written collections policy. You want to have everything in place from the moment a client does not pay your bill so you can immediately begin collection efforts to keep your accounts receivable low and to keep your losses to a minimum.

A sound collections policy has two overarching functions: (1) how to track when clients are behind on their payments and (2) how to proceed with clients when they are late with payments. The details of the policy should cover everything from the beginning of the client relationship to the payment of the final bill. You then need to provide the written policy to every lawyer in the firm and demand strict adherence to it. You also want to involve staff at appropriate levels, educating them about how to identify and communicate with problem clients.

Elements of a Collections Policy

Your collections policy should include sample client forms, a credit policy, collection terms.

Sample Client Forms

You cannot expect the lawyers in your firm to use the requisite forms faithfully unless you include copies in your collections policy. Provide samples of a client intake form, a fee agreement, and an engagement letter. Provide these in electronic versions so secretaries can type in the required information before asking clients to sign them.

Credit Policy

Your firm must have a formal credit policy, and everyone in the firm should know how the terms of credit apply to their clients.

Collection Terms

Collection terms establish debt boundaries and response actions. This means that as a firm, you must decide when any client account becomes past due. Is it thirty days or sixty days after the bill has been sent? Once that’s determined, you must then decide when action on a past due account will begin: When does someone call the client?

At what stage does the firm stop work because the fee has not been paid? How long before the firm sends the account to a collections agency?

Enforcement Policy

Even the best-managed collections process will not work unless every single responsible (billing) lawyer in the firm buys into it. That’s why you need a written enforcement policy outlining the consequences for lawyers who continue to work for clients whose accounts are in arrears.

The best approach includes both an incentive and a penalty. Bonuses might be awarded to lawyers who reach a designated realization rate (i.e., percentage of collections of fees billed). On the penalty side, the firm might withhold payment of a lawyer’s “draw” until that individual complies with the firm’s collections policy. Another approach is to assign someone else to handle the collections for the lawyer who ignores this function and then deduct that expense from the share of the profits otherwise attributable to the lawyer. (However, punishment by withholding compensation cannot be used against associates. They are employees, not partners, and are governed by different rules.)

Collections Management

To ensure that your collections policy is applied consistently, you need to assign responsibility for the policy’s management to one person. Solos and small firms may have to hire a collections manager, even if only part-time.

The collections manager will be responsible for several tasks, including:

• Preparing accounts receivable aging reports, which show how old each client’s billing is and how much each client owes in consecutive thirty-day billing cycles

• Contacting clients who have gone beyond the terms of their payment agreements

• Alerting lawyers about clients who have not paid

• Monitoring the collections process from

It makes the most sense — both economically and to maintain good client relations — to pay someone to handle this end of your business while you work on the client’s legal matters.

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Edward Poll, J.D., M.B.A., CMC, is a law practice management thought leader and contributor to this publication. His website is at www.lawbiz.com.