The Firm: The problem may not be what you think it is

Edward Poll, The Daily Record Newswire

Most are quick to jump to a conclusion about the cure when a health problem arises. Yet what we perceive to be the problem, and the solution, may be much different.

Insomnia is a perfect example. Often people plagued with it try over-the-counter medications or seek a doctor’s prescription as a remedy. Yet sleep experts recommend simple changes — not drinking alcohol or eating right before bedtime, following a regular sleep schedule, eliminating electronic distractions in the bedroom — as the most effective way to fall and stay asleep.

Transfer this lesson to a law practice. Most lawyers are quick to perceive a problem when there is less money coming in the door. They immediately jump to a conclusion about “the cure” — do more marketing. The reality is that declining revenue is really a problem with receivables.

Keeping the accounts-receivables pipeline full means ensuring that the client work secured (marketing) and completed (production) is collected as revenue. Never extend credit to current clients if they have not paid for the work already done. The road to disaster is continuing to do marketing and production with the same clients and then extending credit rather than collecting fees in the hope that these clients will give you more work.

Rather, you should hope they don’t ask you to do more for them … not until they pay what they already owe.

When clients who don’t or won’t pay are the problem, generating new work to cover declining revenue simply isn’t the answer. Instead, make sure clients know they must pay their bills within 30 days. And the way to do that is specify clear collection terms in the engagement agreement.

Lawyers perceive every client as valuable and hate to drop them; the reality is that continuing to do work for clients who don’t pay merely uses your resources without providing the corresponding revenue to pay for those resources. Those clients are not worth keeping.

A new study by George Washington Law School showed that realization rates (the amount of money billed that is collected) average 83.6 percent for all law firms studied, a figure that is a historic low and some 8 percent lower than the 92 percent level at the end of 2007. For AmLaw 100 firms, the realization rate is even lower, at 82.8 percent. If you realize only 80 percent of what you bill, in order to survive you will need to treat that 80 percent as 100 percent of your income.

In other words, all of your financial decisions, including how much revenue your firm needs, will need to be based on the money actually collected, not on the billings sent out. If you can run your business on the 80 percent, that would be fine, but few lawyers can.

If you perceive your revenue is down, and the reality is that you only collect 80 cents on the dollar, you’re like an insomniac — you won’t get many good nights of sleep. Rather than chasing after new clients, what you may really need to do is “stop working” and focus all your energy on collecting the accounts that are overdue.

Even if you do no marketing for 60 days and instead apply that marketing time to the collection of accounts receivable, the amount of money that you bring in could be the equivalent of many months’ revenue. This, however, is a one-time remedial tactic. Lawyers must vigilantly collect what they bill. Failure to do so will cause economic disaster — and that prospect will really keep you awake at night.

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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.