By Randy R. Werner, CPA-CA, JD, LLM/Tax
There are basic steps that can be taken to avoid or manage almost all billing and collection problems. Even better, those same steps will help improve the quality of your practice, attract a better client base, generate more fees, and improve collection and cash flow.
Client screening is the first step toward controlling losses and enhancing your clientele, services, and fee structures. The basic process utilizes a checklist to flag problem clients. Some of the questions include:
- Is the client the kind of client the firm would like to have?
- Does the client demonstrate integrity?
- Is the client financially viable?
- Why did the client choose our firm over other firms?
- What does the client like about our firm that causes them to stay with us?
- Are the client and engagement still a good fit for our firm?
If the client or engagement is not a good fit, do not accept the engagement. Due diligence is also essential to client screening and should include the following steps:
- Performing background and credit history checks
- Obtaining and assessing the quality of references, and obtaining additional references to check, if necessary
- Checking with the predecessor firm after obtaining permission from client
Learn to recognize higher-risk engagements and plan your billing and collections according to the risk before you begin. Buy-sell transactions, public offerings and initial public offerings, limited partnerships, financial services, real estate, and construction engagements all tend to be higher risk.
Engagement letters document the firm’s understanding with the client and serve as the firm’s first line of defense in the event of a dispute. The engagement letter should limit your scope of services by employing words that limit your responsibility and avoiding words that expand it.
To reduce “payment resistance,” involve your clients in the design of the engagement letter, and communicate your billing and payment policies during the initial client interview. Services should be priced for their value. Underbidding or discounting rates to win work can stretch resources to their limits, increase the chances of shortcuts being taken in the work, and expand your exposure to malpractice disputes.
The engagement letter documents the expectations for the engagement, including billing and payment terms. The letter, and all other documentation, can be used later to rectify selective client memory.
The following are some additional recommendations:
- Use standardized letters that may be modified and tailored to fit each of the engagements.
- State estimates, if applicable, and clarify that they are not fee quotes.
- Use retainers and retainer replenishment for clients that are slow-paying, financially-stressed, or new to the firm (until they have established some credit with you). Remind clients that retainers are not an estimate of the total cost of the engagement, do not earn interest, and must be paid before work begins.
- Always include a stop-work clause and enforce the clause to prevent unpaid fees from building up. When the unpaid fees become too large, they provide an incentive for the client to sue for malpractice, especially when the CPA sues for fees. The legal fees incurred as a result of the lawsuits, and the billable time lost by the firm, almost always exceed the amount of fees owed to the firm.
- Include the terms for fee collection. Late charges are legal but should be a reasonable amount, such as 1% per month or 10% per annum. Do not use the term “interest,” which brings into play the laws and regulations governing interest charges. Consider offering discounts for early payment (e.g., if paid within 10 days).
- Include mediation and arbitration clauses, which are effective for avoiding lawsuits over fees. Mediation is effective for all disputes, and arbitration is effective for fee disputes only.
When the engagement expands beyond the terms of the engagement letter, the CPA’s exposure to liability also expands. Provide a new letter, or an addendum to the existing letter, to include additional specific services with an estimate and a confirmation that the client wants the added services at the fees estimated.
Follow-up letters are invaluable for documenting with the client any significant discussions and preventing disputes. Email and faxes are generally good forms of documentation, but email messages should avoid any ill-advised comments that a plaintiff’s attorney can later use to the firm’s detriment.
If the bill or its description of services is unclear, clients will be inclined to put it aside and to call about it later, lengthening the time it takes to pay the bill. Bills that are standardized, clear, concise, and descriptive are more likely to be paid sooner.
Different services often require different billing practices. Consider alternative fee structures, such as hourly rates, fixed fees, value pricing, refundable advance retainers and replenishment, or a combination of structures. All professionals with the firm should be accountable for their timesheet and billing deadlines, but their billable time should be protected by using administrative staff with appropriate training and support to prepare bills and collect payments.
Timely billing leads to better collections. It’s sometimes best to bill more frequently than monthly, as smaller bills are generally paid sooner than larger ones. If you need professional help for billing practices, don’t hesitate to get it.
Communicate frequently with the client, and speak to the person in charge of authorizing the bill payment when it’s due. If it’s a large balance due, call 10 days before the due date to be sure the invoice has been received.
Collection calls are relatively effective, inexpensive, immediate, personal, and informative. Staff should be trained on the rules under the “Fair Debt Collection Practices Act” (FDCPA), which prohibits unintentional harassment of debtors. Anger management and mediation training will also help staff deal with difficult people.
Once you have sent 30-, 60-, and 90-day letters, turn the account over to a professional collection agency to avoid spending valuable time and resources on deadbeats. If a client offers a reasonable partial payment, consider taking it and disengaging. This will free up more of your valuable time to pursue better clients who pay their bills on time and in full.
Randy Werner is a loss prevention executive with CAMICO (www.camico.com). She responds to CAMICO loss prevention hotline inquiries and speaks to CPA groups on a variety of topics.
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