How do you get paid faster? It’s a question that any business worth its salt should ask itself loudly and often. But evidence suggests that many do not. Nor do they come up with effective action plans to speed up cash flow. According to some surveys, the average practice’s lock-up (the amount of time it takes to get paid after starting a piece of work) is around 150 days. No one wants to wait nearly half a year to get paid, so what’s going wrong?
According to David Beech, CEO of professional services business Knights 1759, the answer is simple. Credit control departments are ineffective, partners do not take responsibility for getting paid for the work that they do, and firms are scared that chasing cash will offend clients. So what’s the solution? Simple, says David: axe credit control.
Knights now expects its lawyers to invoice clients and chase payments. Terms are strictly 30 days and they send out LBAs (letters before action) automatically after 45 days. After 60 days, Knights starts court proceedings. The results are impressive: their average lock-up has fallen from 210 days in 2013 to just 100 days in 2017.
David picks up the story: “In June 2012, we moved from a partnership to a corporate structure. A traditional partnership will always struggle to come together to reduce lock-up. Even if you make an effort to tighten payment terms, some partners just won’t buy into it for fear of upsetting clients. To reduce lock-up, a business must stand as one, united.”
The Knights CEO explains why partnerships are so bad at this: “When partners are able to call the shots, they tend to say: ‘My work’s different; my clients don’t pay like that.’ That’s nonsense. Commercial clients pay within 30 days if you ask them to. And the biggest irony is that law firms should be good at collecting cash – because we know how to sue.”
There’s further irony here, says David. Lawyers worry about losing clients and looking bad if they ask their clients to pay on time, but enforcing prompt payments can actually enhance reputation: “We hear this from plenty of clients,” he says. “They tell us they’re going to use us more because they can tell that we run our business properly. So, they look to us for debt recovery services because they see we’re good at it.
“Also,” says David, “it’s unhealthy when lawyers are frightened to say ‘boo’ to their clients. When that happens you’re a client’s servant, rather than their equal. Subservient relationships are not sustainable.”
So why does removing credit control make sense?
“We’re not a volume business; we’re a relationship business,” says David. “We offer a bespoke service, so it’s logical that the person collecting the money is the person who owns the relationship. Otherwise, all credit control can do is phone up and talk to clients, who then tell the caller that he or she needs to speak to the partner because of this or that. You just go round in circles.”
Breaking this Catch 22 is critical to reducing lock-up. However, it’s not just a case of handing out a directive that lawyers are now responsible for chasing invoices, and then sitting back. “To get results senior people must be relentless at pushing the change through,” says David. “There can’t be any exceptions. Late payment can’t be tolerated from any client, even your biggest. And partners who don’t feel comfortable chasing must receive support and guidance until they do.”
To begin with, most partners will feel awkward, but once the change is embedded the rewards are high. Not only does lock-up reduce; lawyers feel empowered, too. “They relish it,” says David. “They enjoy being paid properly; they grow as people, feel more in control, and feel less fear. Taking on the task also gives lawyers another positive reason to engage regularly with clients.”
David hammers home his point with a story.
“I once chased a client who’s also a good friend,” he says. “He owed £9,000 and it had reached 60 days, so I called him. He asked how I was. I told him I’d be better if our clients paid on time! He said: ‘You haven’t bloody called me to discuss that, have you?’ I said: ‘I bloody well have. Cash is paramount in our business.’
“The conversation moved on. I asked how his business was doing with cash collection. He said their average was 80 debtor days, so I asked him why he didn’t try to reduce that number. We hung up and a £9,000 cheque arrived in the office later that day.
“Four months later, the client called back to tell me he’d reduced their debtor days to 55 and as a result had paid off a £2m overdraft.
“If that isn’t an example of good client engagement and effective account management, I don’t know what is.”
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