When lawyers have cash flow problems, it almost always boils down to one thing. They're acting like a credit card instead of a lawyer.
The lawyer, desperate to get the case, will either collect an insufficient retainer, or they won’t collect the retainer at all. Think about it this way. By collecting anything less than your full fee in advance, you’re basically extending credit to your clients. You’re saying you’ll do the work now and they can pay later.
I know some of you are thinking "but, but, how can I know how much it's going to cost them?" or "they'd never go for paying a bigger retainer, I can't do that".
Let's set that aside and think through the issue before we get to the objections.
So let's call a spade a spade. By getting paid less than the full amount, you're extending credit. You’re assuming a lot of risk - but you’re not charging 18 percent interest like the credit card companies.
If you do charge the retainer, what happens when the retainer runs out?
Do you replenish it? How quickly do you replenish it?
If you can’t replenish the retainer, will rules in your jurisdiction allow you to withdraw from the case?
You can’t just assume that everything will be okay. You have to approach retainers as supporting a sound business model, not just the custom of collecting a retainer.
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Most lawyers don't think about it much. They pick a retainer number, and just go with it. See what other lawyers are doing, and do that. But they're never doing the real calculation - which is a credit risk calculation.
I'll put it in the most simplistic fashion: if your retainers run out on a regular basis, clients aren't paying, and you’re forced to do work without getting paid, you've taken a bad credit risk.
In other words, one of two things: it means your retainers aren’t big enough, or you're not picking the right clients. Or both.
You’re in the law business, not the credit business.
If a client needs credit, they can use their credit card or go to a bank. They can get a loan. They can have their case financed by experts whose whole business is to assess risk. There’s absolutely no reason for you to assume the risk.
Now this gives us a different lens on the objections. If a client isn't willing to pay what it's going to cost at the beginning of an engagement, or get financing to let them do it, how likely do you think they'll be to pay later? Once they've got you on the hook?
All these objections come down to client selection. They're problems that begin before the engagement, not during the engagement.
Contingency attorneys use this in a different context, because they need to. They're choosing cases based on an expected recovery, which determines whether or not they'll be getting paid. And that makes sense- as attorneys, we're experts in the law, and have a base of knowledge about what a case might be worth. They're making that risk-reward decision in their expertise - before they take the case.
For all other lawyers - are you an expert in creditworthiness? Are you running extensive credit checks, checking bank balances, and everything else a lender would do? Of course not. That's the whole point. It's not our area of expertise.
How Do You Fix Your Cash Flow?
Cash flow problems arise because you don’t know what your collections will be. But you do know what your expenses are.
You need certainty. When you decide to be a credit card instead of a lawyer, you lose that certainty.
You can get certainty by requiring payment upfront. You can be more careful about the quality of clients you retain.
Whatever approach you take, it all comes down to certainty.
When clients get hung up on payment terms or ask how much time they have to pay their bill, that’s a red flag. If they’re unwilling to pay upfront when they have the greatest need, they're likely to become a problem later.
You set the rules for running your business. Period.
Get as much money upfront as possible. Replenish the retainer before it runs dry, long before it reaches zero. Make sure the retainer is big enough to allow you to be paid fairly if you have to keep working.
Yes, I know some of you are screaming "impossible!" but it's not. Because I've spoken to attorneys in every practice area, in every part of the country, and some have cash flow problems and some don't. The difference isn't the practice area. It's not the where. It's whether they actively screen their clients. They don't just passively take whatever clients come their way.
It comes down to setting the rules. And wherever you are in your practice, however bad your cash flow may seem, right now you can start fixing it by not taking problem clients. It may seem painful now, but every no-pay/slow-pay client you pass on leaves you time to find a good one. A little short term discomfort that will pay off for years to come.