Boosting Receivables: One Large Firm's Approach

Cash flow is the lifeblood of any business. In law firms, where so much is dependent upon maintaining good relationships, getting clients to pay on time can be a delicate, sometimes frustrating, exercise. Smart firms are using everything from technology tools to psychological savvy to improve their realization rates. The efforts are paying off. Firms are getting paid almost 30% faster than in 1995, says Citigroup Private Bank. The challenge today is maintaining that momentum at a time when operations are increasingly dispersed and complex. As chief financial officer at Frost Brown Todd, I manage our collections. We have about 370 lawyers, and offices in Ohio, Indiana, Kentucky, and Tennessee. Although we do not publicly disclose our financials, The American Lawyer (an A&FP sibling publication) ranked us as #161 on its most recent AmLaw 200 roster, with 2002 gross revenues at $105 million and our revenue-per-lawyer at $310 thousand.

During the past 2 years, we've added people, processes and technology to enhance our collection speed and realization rates. We currently have six staff in the finance department who are mainly focused on collections. Our primary financial system is Elite Enterprise from Thomson Elite. We are using a combination of Minisoft Inc.'s Accounts Receivable Collection Systems (ARCS) and internally developed reporting systems and customizations. (Note to shoppers: Collect, from Select Associates, is a competing A/R system.)

Over the past year we have seen a 7-day improvement in average collections ' from 48 to 41 days ' and a 6.4% improvement in the percent collected by 90 days.

How did we do it? We established a centrally managed collections plan, similar to our centralized billing process. These approaches do not replace firm policy or attorney discretion; instead, they build off of the improvements we've already made and take us to the next level of efficiency. We have found these particularly effective with clients who are not meeting our 60-day payment expectations.

Here are some processes we already employ or that are now being implemented:

Underwrite clients as part of the intake process. If you do a better job screening clients and controlling credit risks, you'll save time and money collecting future receivables. Establish credit limits and determine protocols for evaluating whether a client is a good or bad risk.

When screening companies, consider using business credit rating tools. Dun & Bradstreet (www.db.com) can help you evaluate businesses. The D&B rating is composed of two scores: financial strength (ranging from a high of 5A down to HH) and a credit rating (ranging from a high of one down to four).

Other credit rating tools are available for checking individuals. Fair Isaac Corp. (www.fairisaac.com), based in San Rafael, CA., has developed the FICO scoring system to help evaluate creditworthiness. Try using FICO scores initially to test a sample of 50 of your historically poor payers and 50 historically good ones. You can analyze the results to help you create credit limits for a given score. Typically, scores higher than 700 are excellent; scores under 600 raise red flags. Remember, client financial positions change over time, so perform your due diligence periodically.

Establish client-specific guidelines. Use client credit scores to shift from standard time- and dollar-amount breakpoints to client-specific guidelines. Breakpoints should apply to total net inventory: work in progress, plus open accounts receivable, minus remaining retainer.

Credit scores can also be used to determine procedural changes. For example, for clients with lower credit scores, you may consider decreasing trigger dates (when it's time to pick up the phone or send a gentle letter) to 30 or 45 days, instead of 60 to 90 days.

You also may want to establish protocols for when to charge premium prices over the firm's standard rates, or when to require larger retainers.

Adjust the premium or discount rates based on your firm's risk threshold.

Proactively monitor client payment patterns. Calculate each client's average collection speed by looking at their total collections history ' when invoices were billed versus collected. Then, backtrack from the current date to the latest invoice date to determine what's still open. Compare these two dates (average collection speed versus age of outstanding receivables) to identify changes in behavior that could be problematic.

Monitoring calculations should be automatically scheduled and performed by your firm's data warehouse or, absent a warehouse, your collections system. Numbers will vary from client to client, which is why you should always take a holistic view and avoid rigid postures. For example, $10,000 owed on a matter from John Smith could pose a huge risk versus the same amount for a Fortune 500 company.

Similarly, if a client's average payment speed is 21 days, and a receivable is now at 37 days, this is atypical and may indicate an issue. Look at the total inventory, including the buildup of unbilled time that is not being invoiced.

Target collection opportunities. When a client's performance starts to deviate from historical precedent, it's not necessarily good or bad, just different. But that deviation provides an opportunity to examine the situation, to understand what's going on with that client.

A key factor for success is to schedule this processing into your daily routine and not to wait until it's become a fire. Use filtering reports to identify two to five clients to target every day. Quantify any issues, and work to clear the situation by communicating the information to the responsible party (eg, the billing attorney, collections coordinator or practice head) for follow-up as appropriate based on that client's situation.

Take Action

Knowing that a client's collection activity has deviated from the norm doesn't put money in your pocket ' you have to take action. First, make sure that there's no problem on your end. Our policy starts with making sure that all new work is being billed and collected timely. This prevents receivables from building up in older aging brackets.

We sometimes temporarily de-activate numbers for clients who are on an internal “credit hold” because of the billing attorney's failure to promptly send bills or client non-payment. This procedure has been one of our most effective tools, as the pressures related to attorneys' recording time will almost always result in action by the responsible lawyer. The credit hold is released once bills to the client resume, or when a plan to resolve the delinquent invoices has been approved by management. Follow-up is extremely important to this routine.

Make sure your firm's collections plan is as formalized as your billing plan, and more centralized. You may want to start with a simple e-mail from your firm's A/R department to the client's A/P department to check the status.

A week later, follow up with a phone call. For smaller dollar amounts, consider using an e-mail template with a copy of the invoice attached, reserving attorney involvement for larger dollar amounts.

We've found, however, that phone calls tend to be more effective than letters, and can provide an opportunity to identify and resolve any problems that could be motivating the slow payments.

And just prioritizing billing can increase collection speed. If, every month, you send your 20 largest invoices out the door first, your biggest checks are likely to arrive first.

Cash flow is the lifeblood of any business. In law firms, where so much is dependent upon maintaining good relationships, getting clients to pay on time can be a delicate, sometimes frustrating, exercise. Smart firms are using everything from technology tools to psychological savvy to improve their realization rates. The efforts are paying off. Firms are getting paid almost 30% faster than in 1995, says Citigroup Private Bank. The challenge today is maintaining that momentum at a time when operations are increasingly dispersed and complex. As chief financial officer at Frost Brown Todd, I manage our collections. We have about 370 lawyers, and offices in Ohio, Indiana, Kentucky, and Tennessee. Although we do not publicly disclose our financials, The American Lawyer (an A&FP sibling publication) ranked us as #161 on its most recent AmLaw 200 roster, with 2002 gross revenues at $105 million and our revenue-per-lawyer at $310 thousand.

During the past 2 years, we've added people, processes and technology to enhance our collection speed and realization rates. We currently have six staff in the finance department who are mainly focused on collections. Our primary financial system is Elite Enterprise from Thomson Elite. We are using a combination of Minisoft Inc.'s Accounts Receivable Collection Systems (ARCS) and internally developed reporting systems and customizations. (Note to shoppers: Collect, from Select Associates, is a competing A/R system.)

Over the past year we have seen a 7-day improvement in average collections ' from 48 to 41 days ' and a 6.4% improvement in the percent collected by 90 days.

How did we do it? We established a centrally managed collections plan, similar to our centralized billing process. These approaches do not replace firm policy or attorney discretion; instead, they build off of the improvements we've already made and take us to the next level of efficiency. We have found these particularly effective with clients who are not meeting our 60-day payment expectations.

Here are some processes we already employ or that are now being implemented:

Underwrite clients as part of the intake process. If you do a better job screening clients and controlling credit risks, you'll save time and money collecting future receivables. Establish credit limits and determine protocols for evaluating whether a client is a good or bad risk.

When screening companies, consider using business credit rating tools. Dun & Bradstreet (www.db.com) can help you evaluate businesses. The D&B rating is composed of two scores: financial strength (ranging from a high of 5A down to HH) and a credit rating (ranging from a high of one down to four).

Other credit rating tools are available for checking individuals. Fair Isaac Corp. (www.fairisaac.com), based in San Rafael, CA., has developed the FICO scoring system to help evaluate creditworthiness. Try using FICO scores initially to test a sample of 50 of your historically poor payers and 50 historically good ones. You can analyze the results to help you create credit limits for a given score. Typically, scores higher than 700 are excellent; scores under 600 raise red flags. Remember, client financial positions change over time, so perform your due diligence periodically.

Establish client-specific guidelines. Use client credit scores to shift from standard time- and dollar-amount breakpoints to client-specific guidelines. Breakpoints should apply to total net inventory: work in progress, plus open accounts receivable, minus remaining retainer.

Credit scores can also be used to determine procedural changes. For example, for clients with lower credit scores, you may consider decreasing trigger dates (when it's time to pick up the phone or send a gentle letter) to 30 or 45 days, instead of 60 to 90 days.

You also may want to establish protocols for when to charge premium prices over the firm's standard rates, or when to require larger retainers.

Adjust the premium or discount rates based on your firm's risk threshold.

Proactively monitor client payment patterns. Calculate each client's average collection speed by looking at their total collections history ' when invoices were billed versus collected. Then, backtrack from the current date to the latest invoice date to determine what's still open. Compare these two dates (average collection speed versus age of outstanding receivables) to identify changes in behavior that could be problematic.

Monitoring calculations should be automatically scheduled and performed by your firm's data warehouse or, absent a warehouse, your collections system. Numbers will vary from client to client, which is why you should always take a holistic view and avoid rigid postures. For example, $10,000 owed on a matter from John Smith could pose a huge risk versus the same amount for a Fortune 500 company.

Similarly, if a client's average payment speed is 21 days, and a receivable is now at 37 days, this is atypical and may indicate an issue. Look at the total inventory, including the buildup of unbilled time that is not being invoiced.

Target collection opportunities. When a client's performance starts to deviate from historical precedent, it's not necessarily good or bad, just different. But that deviation provides an opportunity to examine the situation, to understand what's going on with that client.

A key factor for success is to schedule this processing into your daily routine and not to wait until it's become a fire. Use filtering reports to identify two to five clients to target every day. Quantify any issues, and work to clear the situation by communicating the information to the responsible party (eg, the billing attorney, collections coordinator or practice head) for follow-up as appropriate based on that client's situation.

Take Action

Knowing that a client's collection activity has deviated from the norm doesn't put money in your pocket ' you have to take action. First, make sure that there's no problem on your end. Our policy starts with making sure that all new work is being billed and collected timely. This prevents receivables from building up in older aging brackets.

We sometimes temporarily de-activate numbers for clients who are on an internal “credit hold” because of the billing attorney's failure to promptly send bills or client non-payment. This procedure has been one of our most effective tools, as the pressures related to attorneys' recording time will almost always result in action by the responsible lawyer. The credit hold is released once bills to the client resume, or when a plan to resolve the delinquent invoices has been approved by management. Follow-up is extremely important to this routine.

Make sure your firm's collections plan is as formalized as your billing plan, and more centralized. You may want to start with a simple e-mail from your firm's A/R department to the client's A/P department to check the status.

A week later, follow up with a phone call. For smaller dollar amounts, consider using an e-mail template with a copy of the invoice attached, reserving attorney involvement for larger dollar amounts.

We've found, however, that phone calls tend to be more effective than letters, and can provide an opportunity to identify and resolve any problems that could be motivating the slow payments.

And just prioritizing billing can increase collection speed. If, every month, you send your 20 largest invoices out the door first, your biggest checks are likely to arrive first.