Guidelines Managing Debtors

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Guidelines Managing Debtors Powered By Docstoc
					Guidelines
         for

        Managing
                 your

                 Debtors
“Get your Bills Paid, or
    enter the Poverty Cycle”
                                Peter Rafferty
                                28 April 2004


Introduction

As has been said an untold number of times before, debtors control can be seen as many firms’
Achilles heal. Most lawyers simply push hard at getting the legal work done and to debit the fee,
but forget to do anything constructive about their outstanding debtors. They then reach the end of
the month and realize that they have no money to pay the staff their salaries. Many big firms like
MacRobert Incorporated don’t necessarily experience the severity of this problem as they have
an odd 45 Fee Earners who work at contributing to the bank balance. In reality, the Fee Earner
who neglects his debtors control rides on the shoulders of those who actively manage theirs.

I still clearly remember the words of Altman-Weil, a large American law firm, regarding the
management of outstanding debtors:

        “A Fee is not a Fee unless it has been Paid”

        and

        “
        Fees            =       Vanity
        Profit          =       Sanity, but only
        Cash            =       Reality
                                         ”

This article attempts to set the ground rules for managing your own debtors successfully.
File ownership and responsibility

When a file is opened on the Accounting system, it is assigned to a file owner (usually called the
Fee Earner). A new Road Accident Fund matter in your Cape Town branch, for example, could
be assigned to lawyer X and she then deals with the matter further. In such a case lawyer X takes
control over the file and her duties include the following:

•   To ensure that the file gets the required legal attention it deserves;
•   To ensure that the fees are debited in accordance with the agreement reached with the client;
•   To ensure that the client actually receives an invoice;
•   To ensure that the client pays the invoice within a reasonable time;
•   To ensure that the file is closed.

Similarly ACME Bank will send an instruction to lawyer Y in your Pretoria branch to deal with a
litigation matter. Lawyer Y then becomes the file owner and is responsible for the steps above.

Please remember that, although one can delegate certain actions, the file owner can never
delegate responsibility. It is at all times the responsibility of the file owner to ensure proper
debtors management.


How debtors work
                               th
If a fee is debited on the 10 of April, it will appear on the Fee Earner’s age analysis as a
“current” debt for the remainder of April (until the month-end procedure is run). This simply means
that the client owes us money and the debt is brand new. It is good to have a lot of current debts
as this indicates that we are doing a lot of business.



              10 April



                   APRIL:           MAY      JUNE         JULY       AUGUST       SEPTEMBER
                  CURRENT



Usually the client requires a VAT invoice and this needs to be produced when the fee is captured.
Most clients will not pay their account if they do not have this invoice, because they will be unable
to reclaim the VAT on the account. At the end of April the month-end procedure will take that debt
and move it into the 30-day debt category, as indicated below.


              10 April         Month-end



                   APRIL:        MAY:        JUNE         JULY       AUGUST       SEPTEMBER
                  CURRENT      30 DAYS



This process usually includes the drafting of a month-end statement, which summarises the
invoices sent to the client during the past month. This month-end statement is not a VAT invoice
and the client will not pay the bill based on this statement alone. They still need the original VAT
invoice.
Some clients require that the original VAT invoice(s) be attached to the month-end statement,
and other clients prefer that the VAT invoice(s) be sent to them during the course of the month,
followed by a month-end statement at the end of the month. Other clients prefer not to receive a
month-end statement at all and only want to receive the VAT invoice.

It is up to the Fee Earner to ensure that he or she knows exactly how the client wants to be billed.
It the Fee Earner is not 100% sure of what his or her client’s preferences are with regard to
billing, the Fee Earner most certainly is neglecting one of the most important duties on the file.

If the client pays the outstanding debt during May, the debt will be removed from the Fee Earner’s
age analysis and the money will be paid into our business account.

If the debt does not get paid during May, the month-end procedure at the end of May will move
that specific debt into June and mark it as a 60-day debt, as shown below.


              10 April        Month-end    Month-end



                   APRIL:        MAY:        JUNE:        JULY       AUGUST      SEPTEMBER
                  CURRENT      30 DAYS      60 DAYS



This should be seen as the last ‘acceptable’ time for the client to pay his or her account. We
should always aim at getting our bills paid within the 30-day period, but having it paid during the
60-day period would always be fine.

Similarly, when the debt remains unpaid during June, the month-end procedure at the end of
June will move that specific debt into July and mark it as a 90-day debt, as indicated below.


              10 April        Month-end    Month-end   Month-end



                   APRIL:        MAY:        JUNE:       JULY:       AUGUST      SEPTEMBER
                  CURRENT      30 DAYS      60 DAYS     90 DAYS



This debt has now become old and bad. To have debtors on your age analysis for 90 days and
longer is a general indication that the debtors are not being managed properly.

It is true that there are some exceptions, but they should be kept to a minimum. If a debt remains
unpaid for 90 days and longer you can assume that one or more of the following things have
happened:

•   The Fee Earner debited the fee, but never sent an invoice to the client, which means that the
    client does not know that he owes us money;
•   The Fee Earner debited the fee that was inconsistent with the fee agreement concluded with
    the client, and the client is unwilling to pay the bill;
•   The Fee Earner’s method of billing the client was not suitable to the client and they are
    therefore unwilling to pay;
•   The Fee Earner never concluded a fee agreement with the client and the client expected a
    smaller bill, and is therefore unwilling to pay;
•   The client is not a good payer and has realized that the Fee Earner does not attend to his or
    her debtors. This means that they can delay payment of your bill as long as possible;
Only the last item above relates to the client being a bad payer. All the other items above relate to
the Fee Earner being a bad debt manager.

As most accounting packages only categorise debts up to 120 days, all debts payable for longer
than 120 days (i.e. 150 days or 180 days) are also marked as 120-day debtors. Your 120-day
debtors are therefore all your debtors older that 120 days and are very bad.

Your debtors could be categorised as follows:

•   Current     =        ”Great, we need a lot of these”                            Green Light
•   30-days     =        ”Great, we need a lot of these, but let’s get it paid”     Green Light
•   60-days     =        ”It’s really time to get it paid”                          Orange Light
•   90-days     =        ”This is bad, something’s wrong”                           Red Light
•   120-days    =        ”We have a serious problem!”                               Red Light

When the debt does not get paid, the firm’s cashflow suffers and the firm has to keep the doors
open with other money.


Level of outstanding debtors and what if those levels are exceeded

If we had to wait 90 days for all our debts to be paid, we would be out of business soon. It is,
however, often difficult to avoid such debtors and our firm assumes that it is acceptable to have a
certain amount of debts older than 90 days.

Certain firms like MacRobert Incorporated, assume that a Fee Earner’s debtors on 90 days and
older may not exceed 50% of that Fee Earner’s average monthly fee. Bonuses may be
jeopardized by exceeding these limits.

An analysis indicates the following:

•   If your fee for March (the first month in the financial year) is R100,000.00, your debtors on 90
    days and older should not exceed R50,000.00 (50% of your average monthly fee).

•   If your fee for April (the second month in the financial year) amounts to R90,000.00, (and
    your average monthly fee has now reduced to R95,000.00), your debtors on 90 days and
    older should not exceed R47,500.00 (50% of your average monthly fee).

•   If your fee for May (the third month in the financial year) amounts to R65,000.00, (and your
    average monthly fee has now reduced to R85,000.00), your debtors on 90 days and older
    should not exceed R42,500.00 (50% of your average monthly fee).

(We would like to work towards decreasing this percentage to 30% of your average monthly fee,
but that will take time. We may see a drop in the acceptable level to 40% next year and 30% in
the year after.)


Make sure you get your age analysis from Accounts

As it is ultimately your responsibility, as the Fee Earner on the file, to collect all outstanding
debits, you should ensure that you are equipped with all the tools to do so. Your age analysis is
one of the tools available to enable you to successfully control your debtors.
The age analysis will be produced by the Accounting Division at the end of every month, and will
be forwarded on to you. If you do not receive this shortly after month-end, you should make
urgent enquiries, as you are ultimately responsible for managing your own debtors.

Mistakes on debit notes and reversal of fees

If a fee has been incorrectly debited it needs to be reversed. Please be aware of the fact that your
fees will reduce with the amounts reversed or written off. This may affect your performance
relating to making your fee target.


Trust credits and the transfer to our Business Account

Quite often your client pays his account and the money is paid into our Trust Account. This
remains in the Trust Account as a credit and will not be transferred to our Business Account
unless you instruct the Accounting Division to do so.

Money paid into our Trust Account with the intention of settling a claim or paying a purchase price
of fixed property, does not belong to us and cannot be transferred to our Business Account. Only
the fee portion of whatever is paid into our account is our money and can be transferred to our
Business Account.

The Law Society regards taking your client’s trust money as a cardinal sin. At MacRobert
Incorporated, we add to that and regard not transferring your fee portion to the Business Account
as equally bad.

Neglecting the transfer of your trust credits to the Business Account, will result in the following:

•   Your age analysis will not decrease;
•   The firm’s cashflow will deteriorate;
•   Your client will get a month-end statement reflecting amounts due and payable that have, in
    fact, already been paid.


Bills received from Advocates and Experts

If you instruct an advocate or an expert on a file, you will receive a bill from that person and you
will be expected to pay it. You will therefore be expected to collect payment of these bills from the
client. Expenses such as these also reflect on your age analysis.

In some cases, firms make use of the equivalent of an in-house counsel. The fees debited by or
on behalf of such an “in-house counsel” must also be collected by the Fee Earner.


Taking deposits and topping up when required

Every now and then one receives an instruction from a client that you do not know. Usually, you
have no assurance that this client will pay your bills.

As the Fee Earner is responsible for all debits on a file and poor performance in this regard could
detriment the chances of receiving a bonus, every Fee Earner in this position should consider
taking a proper deposit from the client.

Often, a Fee Earner takes a deposit which is far too little to cover all the debits and you still have
the same end result … an outstanding amount on your age analysis.
When you tell a client “Please pay me a deposit of R5,000.00” the client hears that “The case will
cost R5,000.00”. He then cannot understand how you can charge him more in the end of the day.
Make sure that you use the correct language and put everything in writing. The following is an
example of how you could word your letter:

           “We are currently unable to estimate the full extent of the costs in this
           matter as it will be influenced by the amount of time spent on the matter
           and the bills received from experts and/or advocates.

           We do require a deposit to cover fees and disbursements and we believe
           that an initial payment of R5,000.00 will be ample.

           We will bill you on a monthly basis at the tariffs agreed upon and we’ll
           deduct the amounts payable from your deposit.

           Once the initial deposit has been depleted, you may be required to top it
           up.

           Please let us therefore have your payment of R5,000.00 in order to enable
           us to start attending to the matter.”

The moral of the story is:

•     The 1st prize is to have a good case from a client who pays well;           Green Light
•     The 2nd prize is to have a bad case from a client who pays well;            Green Light
•     The 3rd prize is to have no work at all; and                                Orange Light
•     The last prize is to have any case from a client who pays badly.            Red Light


Billing regularly and the gratitude curve

Vincent Farris taught me the concept of the Gratitude Curve depicted below. Imagine a client
being arrested for an offense he believes he didn’t commit. He needs to get out on bail and his
mood is at an all time low. His gratitude could be indicated on the Gratitude Curve at point A.
                                                          E


                    The Gratitude Curve                                           By Vincent Farris
                                                                          F

                                          D

    The
    Client’s                                                                  G
    Level
    Of
    Gratitude                       C


                                                                                    H



                         B

                                                                                                      I
                A



                                              Time
A day or two later you help him get out on bail and his gratitude towards you increases to point B
on the graph. He has experienced some relief but still worries about the outcome of the case.

As you prepare for the case and near the trial date, the client starts feeling more and more
confident in your ability and relies heavily on your expertise. These points are indicated by C and
D above.

Finally the trial date comes up and you get the client acquitted on all charges. Your client thinks
that “my lawyer is the best in the world! No one beats him!” (Point E)

A month later the client thinks that “I had a good case, the prosecutors couldn’t pin anything on
me” (Point F)

Another month later the client believes that “any lawyer could have helped me because the facts
of the case were in my favour.” (Point G) (Do you see how his gratitude towards you is waning
and how he is taking ownership of the success in the case?)

Eventually, the client believes that he was so brilliant that he never needed your services as a
lawyer in the first place. All you did was run up a massive bill in legal costs. (Point I)

This is an example of a case where the Fee Earner should have obtained an adequate deposit.
However, should this not have been the case, the best time to bill the client, would be at point E
above, when the client’s gratitude towards you is at its peak.

For every month that you wait after that peak to bill the client, you will wait a further month to get
payment.

If you bill the client three months after the case has been finalized, you will be lucky to get paid
within three months thereafter. This means that you only see the cash for your efforts over half a
year after you completed your case.

Now think of when you started working on the case. This specific case may have run for 12
months, which would mean that you have been working on the case for a year an a half before
you saw any money.

If the client had to quantify his own legal costs in such a case, he would calculate a far smaller bill
payable than you would. The two reasons therefore are:

•   He does not know your fee structure and will omit certain crucial items like preparation and
    telephonic consultations; and
•   He experiences no physical return for his money (like buying a pair of running shoes – you
    still appreciate them 8 months after you bought them)

It is bad business to let a matter carry on for six months and then to send the client a bill that
makes him shudder. He will argue about the bill and delay payment for as long as possible. The
Fee Earner suddenly becomes unpopular and the communication between lawyer and client
breaks down.

It is far better to send him smaller monthly bills and to ensure that he pays them timeously.

This also enables you to monitor your client’s payment habits and to stop working on a file when
you realize that your client is a bad payer. In this way you can limit your damages.
Please ensure that you debit your fees on a monthly basis and that your client gets the invoice. It
is a great idea to phone your client a week after month-end and have the following discussion
with him:

        “Hi John … this is Peter from MacRobert.

        I sent you last month’s bill and I was just wondering if you were happy with
        the format that it was in.

        Great! If there are any adjustments I must make to my billing format and
        procedure to fit in with your systems, please give me a call and I’ll ensure
        that we get it working in the manner you prefer.

        Cheers”

By doing this, you have performed three vital tasks:

•   You made your client understand that you are in touch with your debtors (he will pay his bill
    much sooner now);
•   You have confirmation that he has received your bill; (he can’t later say that he never got it);
    and
•   You have confirmation that he is happy with your billing procedure and format (he can’t later
    say that he required it in a different way).

Billing could become a good form of communication with your client if you do it correctly.

Lawyers in small firms realise the importance of managing their debtors much quicker than those
in bigger firms. They often reach the stage where they need to make a plan in order to pay their
monthly expenses and are forced to take better control over their debtors management. Lawyers
in larger firms often ride on the comfort of having a network of lawyers to depend on. Lawyers in
larger firms should become as involved with their own debtors management as the counterparts
in smaller firms.

Proper debtors control reduces the overdraft, which in turn, reduces the total amount of interest
paid to the bank. This is clean profit and a 100% of the interest saved goes to the shareholders’
pockets.

Peter Rafferty
Practice Manager
MacRobert Incorporated
EMail: prafferty@macrobert.co.za
Direct Tel: +27 12 339 8400
Fax: 0860 125 032
Cell: +27 83 289 1011




                “Get your Bills Paid, or
                    enter the Poverty Cycle”

				
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