Getting debt management right

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By Legal Futures

28 March 2011

In the first of a regular series of articles from the Institute of Legal Finance and Management (formerly the Institute of Legal Cashiers and Administrators), Lisa Dixon outlines the strategies law firms should be adopting to ensure they manage their debts properly

Don't let debt cripple you: ask for a reasonable payment on account of costs when receiving the instruction to act

Firms that encourage and foster a culture which promotes and supports robust and rule-compliant yet still client-focused internal controls and procedures, will be the practices with healthy bank balances. These are certain the firms that will be best placed to take advantage of the opportunities that are sure to arise over the next few years.

We all recognise that in any economic climate cash flow is one of the most important aspects of any business but what practical steps can we take to ensure good debt management?

  1. Firstly review the trend in your debtor days not only as the practice overall but also at least to department or team level. Ideally, individual fee-earner debtor days will also be measured, although it is likely that this will form part of the practice staff appraisal procedure. You may want to consider tying annual performance bonus payments to target reduction in debt (whilst still achieving fees targets, of course!).
  2. Make sure your calculation of debtor days is comparable to external benchmarking information – this sounds obvious but the differences in the formula used can result in quite unusual variances which would seem to be inexplicable.
  3. Benchmark your firm’s trends against external information such as the Law Society’s Benchmarking Survey to see where your current debt management policy would appear to need the greatest work.
  4. If you haven’t already got a debt management policy in place, look to introduce one. Bear in mind this is unlikely to be successful if done by the accounts team or the partners themselves as an isolated exercise – successful debt management is dependent on team work between the collector (usually credit control) and the fee-earner. It must be firm wide.
  5. There are many credit control training courses available – the ILFM is re-introducing its course later this year – all of which should cover creating and implementing this important policy. However, in short it should include:
    – Who is to collect the debts and within what timeframe or collection cycle?
    – What is the reporting structure regarding debts?
    – The maximum the firm expects its debtors to represent of its working capital, broken down by department/team.
    – Whether interest is to be charged on the late payment of debts and at what rate and from what point?
    – What the firm’s credit terms are and when (or if) instalment plans or deferred payment terms are acceptable?
    – How the firm expects to control and minimise the financial exposure levels of its debts – are credit checks undertaken etc?
    – The policy regarding to disbursements particularly in relation to when the firm makes payment.
    – Monitoring and reporting.
    – Exceptions to the policy and who can authorise them.
  6. If you already have a policy, how current is it? Is everyone aware of it and most importantly following it? When was it last updated? The policy needs to kept under review so that it remains congruent with the firm’s current objectives and relevant for its size and service offering.
  7. When meeting with the client for the first time, is the solicitor working to an agenda to ensure all the relevant points are covered? Relevant points are not restricted to meeting the Code of Conduct and other legislative requirements but should also include the practice’s requirements as well. Financial aspects of billing (including who will be paying the bill) and ensuring that the firm’s payment terms are noted should be included on the agenda.
  8. Introduce a policy of asking for a reasonable payment on account of costs when receiving the instruction to act and wait for this to be received before clocking WIP. Ensure that the amount of WIP and costs outstanding never exceed this payment on account, which should be retained until the final bill is submitted. Earmarking it for this purpose will avoid breaches of rule 19 of the Solicitors Accounts Rules.
  9. Ensure bills rendered to the client have sufficient detail. This will not only meet current EC and UK VAT requirements but will also reduce the number of genuine bill queries. There is a balance to be found though – it is important not to over-complicate the bill so that it becomes completely incomprehensible to the ordinary person.
  10. Review your collection cycle to see if it can be shortened. Introduce chasing by telephone if you do not already do so – make sure that the member of staff making the calls understands the need for confidentiality, particularly when leaving messages. I would suggest a maximum of three chasing letters sent over a period of no more than 45 days before sending a final notice before court action letter; less if your payment terms are 30 days or more.
  11. It is likely that the 80:20 rule will apply to your debts. Concentrating efforts on the largest debts (not individual bill balances) does make sense; however, don’t ignore the smaller amounts as they are likely to amount to a significant overall total.
  12. Consider introducing a cash collection bonus for credit controllers based on achieving a realistically stretched monthly or quarterly target.
  13. Unless you have a high volume of corporate clients, I would suggest that sending statements is unlikely to be cost effective.
  14. Implement a regular review of all exceptions to the main policy (i.e. debts that have been suspended from chasing activity) with heads of department. Ensure that the reason for the exception remains valid and that bill queries have been dealt with in the same time frame as any other complaint.
  15. Don’t delay court proceedings where payment is not being legitimately withheld. We are in the business of selling our legal expertise – we should not appear slow to use the legal remedies available for non-payment of debts.

The legal industry of today and tomorrow is an increasingly competitive market with increasingly financially aware clients placing emphasis on both quality and price. It is essential then that everyone in a legal practice works together to achieve good debt management across the whole firm – solicitors often have to consider change themselves before they can successfully change their clients’ behaviour.

Lisa Dixon AILFM, FCCA, MAAT is cash office and compliance manager at midlands law firm Harrison Clark LLP and an executive council member of the Institute of Law Finance & Management

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