profit first for lawyers by RJon Robins
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A/R: It’s REALLY Worse Than You Think

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“Accounts receivables are so much worse for a law firm than most lawyers understand or appreciate. So much worse.” – RJon Robins, author of Profit First for Lawyers

In this episode, How To Manage a Small Law Firm CFO and CEO advisor, Etienne Hardre expands upon RJon’s clip from Chapter 14 about the devastating mathematics behind accounts receivable.

The Devastating Mathematics

Here is what really happens when Client A doesn’t pay their bill. You’ve already spent the money on marketing, sales, production, and overhead to serve them. When their bill goes unpaid, they’re not just skipping the 33% profit, they’re stiffing you on the entire bill. So what happens next?

Now you need to cover marketing, sales, production, and overhead for Clients B, C, and D before you begin to see your first profit from working with all four clients. Here’s the breakdown for a theoretical $10,000 case/matter with a 33% profit:

  1. Client A did not pay their bill
  2. Clients B did pay their bill and their 33% profit goes to cover the costs you already spent on Client A
  3. Client C also paid their bill and their 33% profit covers the overhead from Client A
  4. Client D’s profit finally covers the profit you should have made from Client A.

After four clients you’ve finally recovered what one client should have originally provided. This illustration makes is easy to see how Accounts Receivable is the silent profit killer that is crushing law firms nationwide. Is it any wonder that RJon put A/R in the Profit First for Lawyers book twice?

Why Law Firms Struggle with A/R

Most law firm owners hate looking at their aging A/R reports. Some have six-figures of A/R outstanding and are challenged to ask to be paid for the completed work. The mindset issue around asking for money compounds the problem. The fact is that A/R and Profit First work against each other. The more money trapped in A/R, the harder it becomes to take profits first. To combat the mindset issues, start implementing Profit First even with 1%. The urgency will force you to address your law firm’s accounts receivables.

Take Action on Your A/R

So, what’s a law firm owner with A/R to do? Stop the bleeding.

Start with preventing new A/R from forming. Screen clients for ability to pay during marketing. Use retainer policies and implement “red rubber band” systems that stop work when payments are due. Adopt more frequent billing to top up retainers.

Tackle existing A/R by starting with recent accounts receivables, be flexible with payment plans and discounts. Remember: Get creative because any A/R you collect is 100% profit since you’ve already paid all the associated costs.

Your Action Steps:

  • Implement a red rubber band policy to prevent new A/R
  • Pull your A/R aging report and face reality
  • Start collecting immediately, be creative when necessary

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