Account’s Receivable: The Challenge of a Small Practice

I believe that out of the many challenges a small law practice faces, the collection of accounts receivable is probably one of the highest priorities. We have heard the adage “Cash is king.” It applies to any business, especially to a small law practice. In a perfect world, the client would come to our office with sufficient funds to pay for the legal services required to solve his legal problem. In my experience, many clients are able to support the initial retainer (whatever the amount) but once you get to the third or fourth month in the legal process, the clients’ cash flow begins to thin out.

What do you do in this case?

Do you drop your client after you have established an attorney-client relationship and he is relying on you to solve his issue? It is not easy to do. Do you lower your fees to accommodate this client’s financial ability to pay? Possibly; but this option creates another set of problems which come with the lack of consistency in your billing practices. I have not found a solution for this issue. But the way I have handled this is to establish a monthly budget for the client and discuss what he can expect to pay in legal services on a monthly basis during the course of the representation.

 

Two reasons why I try to arrive at a legal budget for the client:

First, the client needs to have an understanding on how much revenue he must generate to pay for the legal services or to seek another source of financing. Second, for the firm’s cash flow purposes, I need to know whether the client is able to pay a certain monthly amount to maintain the legal services for the time period needed to resolve the issue. I rather the client tell me that he can’t afford $3,000 per month but he can afford $2,000. For a small law practice a $2,000 check is more valuable than a $3,000 invoice. Hence, “budget billing” for a small practice makes financial sense.

There are times, due to litigation activity, that the client’s invoice exceeds the budgeted amount. In this case, I ask the client to pay the budgeted amount and “float” the balance to the next month. The client appreciates the gesture and is more likely to pay the bill. Understanding how the client earns his income is important in developing the “budget billing” approach. I believe that open communication and sensitivity to the client’s financial situation will generate faster payments to your outstanding invoices.