Practice Management

Show me the money

There are things that should keep you up at night and there are things that definitely shouldn't! Something worth losing sleep over is how you are going to win that new client's work against a number of competing firms. Something that you might want to lose sleep over is how you're going to do the work once you have won it. Something you definitely don't want to lose sleep over is how you're going to collect the money from that client once the work is won and done.

Why shouldn't you be losing sleep over how you are going to collect the money once you have completed the work? Easy- your firm should have a defined debtor management process that works and is managed. It should have been in place from the day you opened your doors and it should have been managed from the day you opened your doors. Here is the harsh reality- if you don't have a defined and managed debtor management process, you should go get a job at the Legal Aid Board! It's a good way to ensure that at least you get paid for doing pro-bono work!

Good debtor management ensures client debt is controlled in a responsible manner and each client's debt is within the tolerance levels set. The positive cash-flow benefit, alone, of good debtor management is all the motivation you need to get your debt management process functioning optimally.

Where does debtor management start? Before your client walks through the door! You need to have a policy in place and procedure to manage your debtors. A decent debt management policy and procedure should cover:

  • Client Acceptance- rules/guidelines for extending credit to a client. For example: conducting and ITC check on the potential client's credit worthiness
  • Invoicing- this is a big part of debtor management. If your debtor doesn't know exactly what he owes you, you can't expect him to pay. Would you? For example: delivering the invoices to your client on time and regularly and having them validate receipt thereof.
  • Collection- rules/guidelines for going about collecting money owed to you. For example: sending out a reminder by sms or email a day or two before the money is due.
  • Write-off- rules/guidelines for writing-off debts. No matter how good your debtor management system is, having to write-off money owed to you is a reality. The quality of your debtor management system should ensure that write-offs are minimised. For example: all debts older than 180 days should be written-off and no further work should be done for the client
  • Debt Recovery- rules/guidelines for recovery of debts written-off. We live in a very dynamic financial environment and people who weren't able to pay you 2 months ago might be able to pay you today and you need to cater for this. For example: written-off debts should be handed over to your firm's collection department for recovery.

Management oversight, as discussed below, is key to making the above policy and related procedures effective.

The policy and procedures then need to be distributed to staff. Staff need to understand the policy and procedures and apply them consistently and without exception. The best way to do this is to have the policies and procedures integrated into your firm's business processes. For example- when a potential new client engages with your firm, one of the things the fee earner has to do is complete a credit check on that person. Having a practice management system (like GhostPractice) that will automate some/most of what you need to do, from a debtor management perspective, would be invaluable in terms of streamlining your processes and forcing staff to adhere to your debtor management process.

Why do staff need to be "won over" in terms of making sure the firm's debtor management processes are not circumvented? In their eagerness to do work, write fees, make targets and get big bonuses, the discipline that debtor management brings can be incorrectly perceived as negatively impacting on the ability of staff to write fees and make targets. This is because most staff don't see the big picture with regard to the downsides of engaging with bad debtors. For example: if a fee earner is under pressure to meet a target, he/she may decide to skip the credit check step in accepting a new client and do the work so he/she can meet their target. Potentially the firm could be out of pocket due to the fact the VAT on the fees written will have to be paid, the fee earner will have to be paid a bonus, finance and admin staff will have to spend payable hours to try and collect the debt which may never have been obtainable in the first place.

How do you overcome circumvention of your debtor management processes? Having a practice management system like GhostPractice is definitely a step in the right direction, but in itself is not the end game- this is where management oversight comes in! No business process can claim to be robust without management oversight- it's a fact and not just a pitch to ensure people like me always have jobs. Staff will do the work and follow the process, but good managers will ensure that the work has been done correctly and without taking shortcuts especially side stepping the internal controls which are in place. With a practice management system in place you should have the reports and tools to manage by exception. This will enable managers to be efficient and your organisation structure not to be bloated and top heavy. Furthermore actively managing your staff who are responsible for debtors will ensure that issues are identified timeously and the risk of bad debt is managed- there is no point in continuing to do work for a client who isn't paying and no point in trying to collect money from a client who just can't pay!

In terms of management oversight of the debt management process, key reports that should be used are the age analysis. Your age analysis is a listing of debtors' accounts (i.e. the amounts owing to a business), usually produced monthly, which analyses the age of the debts by splitting them into such categories based on how long the debts have been outstanding. Your age analysis should always be available to you at the push of a button and you should be pushing that button frequently as a manager. Another report you should be using is the Debtors due and overdue report- this is the exception based report that will help you run your firm more efficiently. Looking at reports is great, but you need to take action based on what the reports are telling you- that action can be as simple extracting a list of your 10 biggest debtors over 90 days and calling them. Something as simple as this, which shouldn't take longer than an hour, can give you a whole new perspective as to what is hindering the collection of your outstanding debts as well as improve your cash-flow dramatically in a matter of days. Now that's a quick-win we consultants like to go on about!

As a very rudimentary guideline any firm whose debtor's book has more than 10% of its debts outstanding longer than 90 days has a poor debt management process. And every person you speak to in such firms has a "very good" reason why it's okay. The reality is that it's usually due to the fact the debtor management process in these firms is either non-existent or unmanaged. Most firms in the industry probably don't meet this benchmark.

If you are one of those firms with poor debtor management, you have two alternatives- either prepare to go out of business; or roll up your sleeves and knuckle down to getting your debtor management processes in place and working properly. Once you start actively managing your debtors you will start collecting your money faster and more regularly, your cash-flow will improve, you won't take on clients not worth having, your staff will be happier and you can focus on the things that you should be doing- like how you are going to win that new client's work against your competitors.

If you would like to know more about the GhostPractice Practice, how we can help you with debt management or how GhostPractice is driving change in the legal industry feel free to call me on 084 586 6789 or email me

Kuben Naidoo

Leave a comment:

Security Picture (click to change)
Word shown in picture:
menu close

Search Articles