Effective cash collection is essential to the success of any business, but is especially relevant in the current climate.
The key to credit control is timeliness. It is much easier to recover monies if they are chased promptly, especially if the good work performed by your practice is still fresh in the client’s mind.
A “Financial Benchmarking Study of Leading Law Firms in Europe” carried out by accountants BDO Stoy Hayward, showed the average "lock-up" period in the U.K to be 183 days, compared to the best performing country, Belgium, which has a median lock-up of only 84 days.
Debtors are an important part of working capital and careful management of this asset is required to maintain the liquidity of a legal practice.
Incidentally, don’t overlook your entitlement to charge interest on outstanding amounts, provided you have made provision for this in your terms of business, and the interest rate is not so high as to constitute a penalty rate (up to 8% should be fine). You may also be able to claim interest and compensation under the Late Payment of Commercial Debts (Interest) Act 1988.
ALB now has facilities to allow you to act quickly and firmly so as not to put your business at risk from unpaid bills becoming bad debts.
These are:
Credit limits at client, matter and bill level
A dashboard element to alert fee earners when credit limits are exceeded
A screen for credit controllers which provides a work list and makes it easy to chase by:
Telephone (the most effective method)
SMS message (unusual and therefore potentially very effective)
Escalating chase letters (typically sent 7, 14 and 21 days after the bill became payable threatening proceedings)
Note on Terminology
“Credit Control” is a functional area with an associated role within a law firm of a “Credit Controller” – this may be a dedicated person, or “doing credit control” may be part of a cashier’s job. It is used in this manual to refer to the whole module/wider process/concept. The particular process of automatically producing letters/emails/telephone calls to chase outstanding bills – a subset of this wider function – is referred to as “Cash Collection”.