16 Nov Improving Your Firm’s Collection Rates – The LeXFactor
In this episode, Brooke Lively, Founder of Cathedral Capital, virtually visited the Lexicon studio and chatted with hosts Lauren Hoffmann and Brad Paubel about improving law firm collection rates and the strategy behind cash flow forecasting. The trio dives into the average collection rate for US firms, the five pieces of the accounts receivable puzzle and the key components of cash flow from financing activities.
Cathedral Capital is a team of CFOs and profitability strategists who help entrepreneurs turn their businesses into profitable companies.
Make sure to listen and subscribe to The LeXFactor on your favorite podcast platform today. Plus, Brooke is offering her five pieces in the A/R puzzle as a thank you for listening to the episode – just enter your email here to get the info right in your inbox.
Lauren Hoffmann: Hey, everybody. Welcome to another episode of the LeXFactor. It’s your host, Lauren.
Brad Paubel: Co-host, Brad right here.
LH: We have a guest today and you guys may have recognized her voice because she’s been here before. So we have a two-timer on today. I don’t know if you guys remember Brooke Lively from Cathedral Capital, but welcome back. We remember you obviously.
Brooke Lively: Thanks, guys. I know, I have to say, you guys asked me back for a second time and I was super excited because I think you guys are the most fun podcast I’ve ever done.
Cathedral Capital Helps Make Law Firms More Profitable
LH: We need a quote her on that. Justin, pull that one out. Brooke, just in case our listeners didn’t hear you last time, give us a little bit of information about yourself. Give us some background, what you do, what makes you tick, what keeps you going.
BL: Wow, so many roads with that, but I’ll go down the appropriate one. So I own Cathedral Capital – we call it Cath Cap. We make law firms more profitable by serving as their outsource CFO.
I do this because I was running my father’s law firm. After grad school I had like worked at a hedge fund. And my father likes to shed his law partners every seven to 10 years. And he had shed his law partners because he had lost his firm manager that had been with him for like 30 years. And so he’s like, “Can you help me do this?” I’m like, “Sure.”
So, you know, in less than two years, probably 18 months we had started, grown, and scaled it to a seven-figure business. And at one point I hired a consultant to help with sales and marketing and his clients started coming to me and saying, “Can you do for us what you do for your family?”
And that was when I really realized it wasn’t just my father and brother that weren’t numbers driven. It was all attorneys. That’s why we’re here. And that it’s so much easier and so much more efficient to make decisions based on data. Because you only make that decision once.
Data-Driven Decisions in the Legal Industry
LH: And most people don’t use data, especially in this industry, unfortunately.
BL: They don’t. And what happens is you make the decision. You’re taking a deposition at four in the afternoon, and really what’s going through your head is “Was that the right thing to do?” And then you go home to dinner and you’re having dinner with your family thinking, “Well, maybe I should have taken option C,” and then you wake up at 2 a.m., “Wait, wait, wait, maybe option B.” You keep making the same decision over and over and over again, and that’s not productive. Or you make the decision just to get past it. Have you ever seen someone do that? They just get it over with. Pick something and move on.
LH: When that I chose my co-host, that’s how I chose my co-host. I was sick of the process, and I was like, “Just go with Brad and let’s get moving.”
BL: Brad, she’s got it out for you. And then the other way that attorneys make decisions is they just don’t. “Let’s think about that. Let’s get a little more information.”
LH: And eventually everybody forgets about it and you move on to a different project.
BL: Yeah, and then it blows up and you have to make a decision and you just choose anyone to get past it. It’s a horrid circle to be caught in. And if you’re using data, you see the decision coming, you can look at your options. Just like you do with a case, you can say, “OK, what’s going on? What are the options? What do I think will have the best outcome?” And when I talk about people’s law firms, I’m like, doesn’t it deserve the same care that you give your clients’ cases?
LH: And when you have the data you can validate. There’s no questioning. You’re like, “I use this data to make my answer and I now see that it worked because I have the data.”
BP: Absolutely. It turns the horrid circle into a great circle.
LH: All right, so you’ve ventured off on your own. That’s how we got to where we are today. Obviously you’re doing awesome because you’re getting podcasts gigs, right?
BL: I love doing podcasts. What I love is helping attorneys. It just kills me that there are so many attorneys that, you know, have no business experience. And law school is not preparing them to own a business and they get out of school and they think all they have to do is practice law. And all of a sudden, they’re either on a partnership track to run a law firm or they go out and they start their own. And they’re just so ill-equipped, and they don’t know where to turn. And they go to bar functions and everybody’s, like, beating their chest, “Oh, I’ve got this awesome firm.” And they’re not telling the truth, so nobody else feels like they can say, “I’m really struggling.” So they end up struggling in isolation. So anyway, that I can get my message out and really talk to them and say, “Look not your fault. You’re not alone. I’ve seen worse, because I promise you I have seen worse. And here’s some ways that it can be better. I’m just so passionate about that.
LH: And you’re great at what you do.
BL: It’s fun.
Improving a Law Firm’s Collection Rate
LH: So today, that being said, we’re going to dig into collection rates, which I think is a really cool thing because it’s probably something that everybody could use a little help in. We’ve talked about this a little bit before, too, and it opened my eyes because I’m fairly new to the legal industry. It’s been two years now, but there is literally so much that can be done to improve your collection rates. And there’s so much that’s not even hard to do. It’s easy, simple things that you can do to improve your collection rates. So let’s dig into that a little bit. Let’s talk through it, Brooke. What are some ideas that you have that you’ve talked to your clients about to improve their collection rates?
BP: We should tell everybody to get some pen and paper out. Take notes. This is the meat right here.
LH: And we have some stats to start with, some data.
BL: Data-driven decisions over here. While you’re getting your pen, I’ll tell you, Clio does a state of the legal report every year called the Legal Trends Report, and in 2020 they said the average collection rate for a U.S. law firm was 86%. And for a year, I have been trying to figure out how they got to that number because that’s not my experience.
LH: Lower or higher?
BL: I’ve talked to other people that are in the industry that do things that are similar to mine. We think the average collection rate is really closer to 75%. And the firms we see are collecting 75. If they’re collecting 80, they’re doing pretty well. From our experience. But that really frustrates me. That is the equivalent of a car dealership giving every fourth person that walks on the lot a free car.
LH: That would be nice. Don’t you want to be with that dealership? But that is really good perspective. That is a great analogy.
BL: And here’s another one. If you collect 80%, that’s like hauling your team in and having them work Monday through Thursday for a reason. And then basically hauling them in on Friday for no reason, because you’re not going to collect the money they bill that day. So wasting everybody’s time.
BP: So really what we’re saying here is we need to stop working Fridays. Is that what you’re saying? No, I’m just joking. That’s what I’m taking from this.
BL: I promise you your team would rather have a three-day weekend than find out they’re working and you’re not bothering to collect it. You don’t have the things in place to collect. So what we do with our clients is what we call the five pieces of the AR puzzle. And when we implement these, the collection rates go from 75% to 92. Ninety-two is our bottom-level goal. And I was talking to a client about this. I’m like, “Yeah, 92 is our goal.” He’s like, “Why aren’t you setting that goal so low?” He’s like, “We’re closer to 98%.” I was like, “OK, Sam. Yes, you are.” I think Sam would be perfectly happy if everybody knew he was collecting 98%. He’s like, “Why are you setting people’s expectations so low?” I’m like, “Well, if I go on a podcast and say our clients all collect at 98%+, no one is going to believe me.
LH: But why 92? That’s an interesting number.
BL: Because we can easily get all of our clients to 92. So that’s really kind of our bare minimum. Once we get it to 92, we quit hammering on it quite so hard. You want to know how we get people to 92?
LH: Why do you think you’re here today? Tell me more
BL: So there are five things. The first thing is get an initial retainer. And I see all kinds of people that are like, “Yeah, I get an initial retainer. I get $500.” And I’m like, “How long is that $500 going to last, Mr. I bill at $350 an hour? I’m like, “OK, so you can do an hour and 15 minutes’ worth of work.” That’s not going to get you anywhere. You need to have three months — the first three months in that retainer account and you need to do that before you start working. People always ask me why three months? Here’s why. Because you got a client on October 1, you bill all the month of October, and you send the bill out on November 1st. I don’t care what your bill says. It can say due upon receipt, it can say due in 10 days, your client thinks they have 30 days. They think they don’t have to pay until the end of November. We can’t change that. We have taught clients this. So you’ve worked all of October. You work all of November. On December 1 you send out the second bill. Your client at this point is like sitting up and taking notice that the first bill is probably due. There’s another one so I probably need to pay the last one. So it’s now the end of November. It’s December 1st, the client thinks, “OK, I’ve gotten the second bill. I need to pay the first one.” Or the client may be a deadbeat. But December 1 is when you really start trying to collect. So you collect all the month of December and by the end of December, you know if you’ve got a deadbeat client or not. And if you have the first three months in the initial retainer, then you’re golden and you can get out of this case and really all you’ll be out is the time of withdrawing. So that’s why I always say three months.
LH: Do you ever come across the instance with their clients that maybe their clients are a little turned off by that heftier amount upfront and in turn take their business elsewhere?
BL: Yeah, and that’s OK. Because if you have a client who doesn’t want to pay you, wouldn’t you rather find that out at the outset, than three, four, five, six months in? Clients are interviewing you to see if you’re going to be a good attorney, let’s interview the client and see if they’re going to be a good client and let’s get rid of them before they get in your system.
LH: You don’t have to take every client.
BL: You really don’t.
BL: If you turn off one in five clients because they don’t want to pay your initial retainer, do you know what will happen? Your collection rate will go from 80% to 100%. You will make the same exact amount of money you were making before.
LH: True and doing less work.
BL: And doing 20% less work. So where’s the losing on that?
LH: And that is only step No. 1 in your puzzle.
BP: I know, like, do we need four more? I don’t even know what’s going to happen next. I’m already collecting at 100% now. What’s next?
The Importance of an Evergreen Retainer and Stop-Work Policy
BL: So the second part is have an evergreen retainer. If you look at most cases – not all, but most cases are really kind of work-heavy in the first few months. Especially if it’s litigation, you’ve got to answer, there’s all kinds of steps. Step No. 2 is have an evergreen retainer and your evergreen retainer should be equal to the average three months of billing. People kind of look at me funny when I say this. Think about this, in most new cases there’s more work done in the first three months, especially if it’s litigation, right? And then the workload kind of falls off and evens out a little bit. So let’s do an average three months and we do an evergreen retainer and I get pushback because people are like, “Hello, Brooke. My client has already proved they’re going to pay.” But a client will quit paying at any time for any reason and it rarely has anything to do with you.
LH: Like when you have an interview or your first month at a new job. You go all out and put on this big shiny show and then you show your true colors a couple months in.
BL: But think about what happens in your clients’ lives. They could get divorced. They could have a child go to college. They can have a child get married. Those are all cash-intensive activities. It doesn’t have anything to do with you.
Here’s the next thing. No. 3. Have a stop-work policy. I had a client that came to me and in her fee agreement it said, “If you can’t pay me, we will put a lien on your property, blah, blah, blah, blah, blah, blah, blah.” I’m like, “I’m sorry. Did you just tell your client that they don’t have to pay you and that nothing will happen?” She’s like, “Oh, don’t think about it like that.” She was like, “Everything we have paid you was worth it for that one piece right here.” But you want to have a stop-work policy. And you want your clients to know what it is and you want to enforce it. And this does not have to be something that’s difficult. One of my favorite ones is an attorney out of the Pacific Northwest. She went to Office Depot and for like $2.50 she bought a giant box of big, huge red, rubber bands. And when a client quit paying, she put a red rubber band on the file. And if you went into the file room and the file had a red rubber band, you weren’t supposed to touch it. I liked that. And if someone was walking through the office and there was a file with a red rubber band on somebody’s desk, or even just the red rubber band. They got called on it. Simple, easy, cheap. These days with everybody using all the great software that’s out there that’s cloud-based, you can lock a file. So it can be simple. It can be easy. It can be a red rubber band but be sure you communicate it not only to your staff but to your clients and then you enforce it.
LH: I like that. I’m very much a visual person. like when I have a to-do list, I’ll write it down and cross stuff off. And so I’m envisioning that red rubber banner on the file folder and I’m like, “Yes. I like that.”
Controlling the Timing of Clients’ Payments
BL: No. 4. So this one’s a big one and I alluded to it earlier where the client thinks they have 30 days to pay their bill. You need to control the timing of the payment. Do not let clients do that. I was at my best friend’s house … and she lives in Pennsylvania, and I was up there visiting, and we walked in the house on a Sunday night, she opened a drawer, and she took out this big stack of mail. She could hardly get the drawer open. So we’re chatting and she’s opening mail and most of it is going in the trash I’m like, “Martha, what is that?” “It’s my mail.” I’m like, “How much mail is that?” She’s like, “Oh, I don’t know, probably six weeks’ worth.” And I’m like, “What about your bills?” She said, “All of our regular bills are on auto pay. Every now and then I go through this and I find the one-off bills.” So sure enough, when I decided I was going to go to bed, she was down to a small stack of one-off bills and she said, “OK, I’m going to bed too.” I’m like, “Are we going to pay these bills?” as she’s putting them back in the drawer. She’s like, “No, I’ve done enough work on this tonight.” Attorneys, this is what is happening to your bills. Your one-off bills. They are sitting in that kitchen drawer for six weeks. And before you go and say, “Whoa, wait a minute. I have business clients.” It’s about that much better for you. Because I don’t care what your bill says, they think they have until the end of the month to pay it and most businesses write checks twice a month. So that first check run comes through and, “Hey, bill’s not due.” And then the second check run, they’re going to add up all the bills that they have and see how much cash they have and you may or may not get paid because history has taught them, but most attorneys do not have a stop-work policy, so nothing’s going to happen.
LH: And honestly, if they’re another two weeks late, it’s not the end of the world. It’s fine.
BL: Yeah, no big deal. So you need to take payment timing out of the client’s hand and you do this by accepting credit cards. And by having every client sign an authorization form that says, “I will get the bill. I will have 10 days to dispute it. If I do not dispute it, you are authorized to charge my card.” And then you’re in control. I mean for heaven sakes, you know that if you send bills out on the first that on the 11th, you get to charge and you’re going to collect almost everything.
LH: And that’s honestly pretty common. You’re not asking something that isn’t OK or doesn’t happen in other areas. Like you go to a hotel, you need a credit card on file.
BL: And clients love it, frankly. For two reasons, one, they’re getting more points, more miles, more whatever they do. And the second reason is it’s one less bill I have to deal with.
LH: I literally despise paying bills. I have the majority of my, my reoccurring ones on autopay, but not all of them. And there’s one I have to log in every month and they have the worst website. Every month I have to type in my account number. The way the fields are built, they don’t auto-populate so it doesn’t remember anything. If I started typing in “Lauren,” it doesn’t finish it for me. I have to put in my routing number every time. And it’s all it’s on me because I haven’t set up autopay. So I will honestly put it off. I’m like, “It’s not due today. I’m going to wait and pay it later.” Because I’m too lazy to do it.
BL: And how did you feel about that vendor? Are they your favorite vendor?
LH: No, it pisses me off. I’m like, “Get with the 21st century! Get it together!”
Implementing Fee Agreements
BL: And here’s the thing, you don’t want to jeopardize your relationship with your client over something as annoying as them paying your bill.
I’m going to go into the fifth part, and the fifth is how we get all of this done. And we do it through a fee agreement. The state wants you to have a fee agreement. You might as well have one that benefits you and it’s in the conversation where they’re signing the fee agreement that you set expectations.
The expectation is I am going to be paid every month on time. And this is how we’re going to do it. And these are the consequences if we don’t. So draft a fee agreement that works for you.
LH: It needs to work for you. Don’t just draft something because this is how it should be done, this is a norm. There’s options.
BL: Fee agreement is No. 5. Yeah, that’s right.
BP: The five pieces, they come together.
LH: Do you ever do promo items for your company? You should get an actual puzzle.
BP: Five pieces and it comes together and forms a big dollar and that could be like, and it comes together and it forms a big dollar sign for collection.
BL: I’ll tell you what I do have, which I’m happy to give all your listeners … I do have a whole thing on the five pieces of the AR hustle that includes some language for your fee agreement and all kinds of stuff. Do you think your listeners would like that?
BL: All right, so why don’t we do that.
LH: I will say that’s the one place on our website on our end that gets the most traction is our knowledge base. Like people just love reading and tips and education. So that would be awesome.
BL: I’ll tell you what, if everybody who wants to goes to https://www.cathcap.com/lexfactorar then they can get all that information.
So here’s what I love about the five pieces of the AR puzzle. When you get that in place, all of a sudden, you’re now in control of when and how you get money, which makes forecasting your cashflow so easy. You send the bill out on the first, you get paid on the 10th. And I think we all know that cash is important. Cash is king. Cash is like oxygen to your business, right? And we talk all the time about having a cashflow forecast and knowing when your cash is going to come in is awesome. But it never, ever, ever matches up when your cash goes out. Think about it, even in this firm that we’re building, where you get all your cash in on the 11th, while by the time it’s deposited from the credit cards it’s probably the 13 You’ve got the first week of the month, which is payroll and rent, which is probably your most expensive week of the month. Backed up really quickly by week three. So you’ve got to make sure that you’ve got the cash you need and we do this through having a cashflow forecast. And we look six to eight weeks ahead.
LH: Why six to eight weeks?
BL: Well, you want to know how much you’re going to have at the end of every week for the reasons we just discussed and you want it far enough ahead that you can make a decision and that you can take action. So we had a client named Dan and he’s out in the Pacific Northwest, and I sat down with him on one of his regular CFO calls. I’m like, “OK, Dan. There’s red on your cashflow forecast.” And there was a little bit of [panic]. So we looked at it and said, “OK, let’s problem solve this. It’s seven weeks out. What are we going to do?” So we look to see, can we move rent? His landlord’s pretty understanding if it went out a week. Nope, that wasn’t going to do it. We couldn’t move bills. We had to do something big. And we kind of brainstorm some ideas and then we came back together a week later and I look at his cashflow forecast and there’s no red. Damn. What happened?
He said, “Oh, you remember that blue binder project we’ve been talking about?” By the way, it was named the blue binder project because it literally was being housed in a blue binder in there. We’re really creative with names. So he said, “We built that out and started selling it.” Because it had kind of been out there. He’s a DUI attorney and this was a program that he was developing in conjunction with a therapist. And what it does is it puts people who get a DUI through this program and they take their certificate of completion to their sentencing and it is literally changing the way people are being sentenced in Oregon now. Like isn’t that an awesome thing?
BP: But he wouldn’t have been able to do that if he wasn’t looking ahead, like you said, at the cashflow. Oh, I stole your thunder. I’m sorry. I’m sorry, here. Wait, wait. But how was he able to do that and get it in place so far ahead?
BL: I mean, that’s the thing. You’re looking at it and you have time to deal with it. This was something that was already sort of in process and he didn’t sell everything he needed to sell in one week. But he knew how many he could sell and put that into his cashflow forecast and got rid of the red.
LH: And we get so used to just looking at where we are, you get so busy, you have your head down, you don’t get a chance to look ahead, but obviously there’s some major problems that can happen if you don’t do so.
BL: If you’re not looking ahead, you find out that you’re having a cash crunch maybe seven days, probably closer to seven hours.
LH: And then you’re reactive before you hit it.
BL: And there is no option. There is no bank that is going to start and fund a line of credit in seven hours.
LH: You’re reactive. You’re desperate. You don’t think through your decisions, you don’t use that data that we talked about to make the right decision. You’re like, “Crap, what can I do real quick?”
BL: I just want to go over really quickly what’s in a cashflow forecast. This is not your P&L. This is not a big, huge 42-, 52-line, 400-line spreadsheet. It has just a few lines. When are we getting cash? We do actually put this on a couple of lines sometimes because we’ll have the cash that comes in from your trust account. We’ll have the cash that comes in when we charge clients’ credit cards. And then most firms do have a little bit of AR. So we leave a line for AR for if someone gets behind or their credit card gets stolen.
That’s the first one. Then we go into cash that goes out, right? You’ve got a line for recurring bills. You know what bills are going to hit when. You just key them into the appropriate week.
Then we all have extraordinary expenses. Things that we don’t expect. Mary needs a new computer. I have an opportunity to be on a podcast and they’re going to charge me $50,000.
Then there are a couple of other things, as the owner of the firm you should take a draw. You should get paid for the time, effort and risk you’re putting into this firm. So put that on a line. If you have any debt and you’ve got to make debt payments, put that on a line.
Then if you want to move money into savings, that’s another line and you just add it up. And the amount of money you have at the end of one week becomes the beginning balance for the next week. It’s that easy, but it lets you see, it lets you look forward and it just gives you a lot more confidence in what you’re doing.
LH: I like that you make everything so easy too. There are not 40 steps that you have to take and it’s nothing hard. It’s nothing that lawyers don’t know how to do. You’re not asking them to get too much out of their comfort zone. And so that’s why I appreciate having you on. Everything is so insightful that you do, but you make it simple.
BL: I want it to be easy. I want to use the language that attorneys use. I’m not here to make things difficult. I’m here to make things easier.
That client, Dan, out in the Pacific Northwest was so funny, he’s like, “Can you make everything a binary decision?” I’m like, “Yeah, it is a, or it is B. If you choose B, the next question, is, ‘Is it B or is it C?’” We’re just going to go through, because none of this is rocket science. It’s just stuff that, that, that attorneys aren’t used to seeing,
LH: Or they don’t have time to look ahead and consider it all.
BL: So let’s break it down into small chunks and make it easy to consume.
LH: If only everything could be that way.
Brooke, as usual, we loved having you on today. Today’s episode was extra fun I would say. We missed you. Am I allowed to invite someone back a third time?
BP: That’s when they become a regular.
LH: The LeXFactor with Simply Insightful Brooke Lively.
BP: And then after our 7,000th episode she’ll be coming in on our reunion tour.
LH: On that note, Brooke, thank you again. It was a pleasure. We loved having you.
BL: My pleasure. I love hanging out with you guys. You all are so much fun.
LH: And again, remind our listeners before we close out today’s episode, what is the website they can go to for the five tips?
LH: All right everybody. Thanks for tuning into another episode of the LexFactor. Make sure you like our episode, subscribe, download, it’s on multiple platforms as you know, wherever you prefer to listen, you can find us there.
BP: It really does help.
LH: It does. Thanks for tuning in and we’ll talk to you next time.