Cash Flow Reports – Part 6: Accounts Receivable

Ahh the age-old problem of lawyers:  collecting accounts receivable.  The bane of the lawyering class. The inconvenient truth is that if you are working on the basis of an account receivable, you are most probably working for less – and in some cases far less – than your standard hourly rate.

Woody Allen once said: “Money is better than poverty, if only for financial reasons.“

So, if money is better than poverty, our next cash flow report to produce (and examine) on a monthly, if not more frequent, basis: Aged Accounts Receivables.

Your accounts receivable should be grouped according to current, over 30, over 60, over 90 and older.  Look at the total amount of accounts receivable: Are they increasing or decreasing?  What percentage are they of your annual billings?  Fifteen percent is high – 5% is within the range of acceptability.

How old are they?  Uncollectable accounts represent holes in the bottom of the financial boat;  they will sink the financial ship if not plugged.  If you do have unpaid accounts that have been outstanding for more than 30 days, do something about them– quickly!   Remember that aging only benefits cheese and wine.  Make early attempts at collection and determine whether or not further time and energy is warranted.

Remember: Attempting to collect an unpaid account from an unhappy client often leads to professional misconduct complaints and possible malpractice claims – both of which can be emotionally and financially draining as well as PR nightmares.  By acting quickly and decisively – and staying within your written client credit policy – you can minimize your exposure to bad debts.

Here is a further tip:  A firm we know had a partner who was retired yet still wanted to come to the office a few days a week and do something useful.  In an inspired moment, the firm assigned him the job of collecting the firm’s accounts receivable.  He knew the clients, he knew the firm, and the magic happened.  The managing partner told us that, “The firm’s accounts receivable never looked so good!”