Client screeningClient screening is a crucial step toward controlling losses and enhancing clientele, services, and fee structures. The basic process uses a checklist to flag problematic prospective clients.
Some questions about prospective clients may include:
- Is the client the kind of client the firm would like to have?
- Does the client demonstrate integrity?
- Is the client financially viable?
Due diligence for client screening should include the following steps:
- Performing background and credit history checks;
- Obtaining and assessing the quality of references, including additional references, if necessary;
- Obtaining permission to check with the predecessor firm.
Client reviewFirms should also have a process in place to document existing problem clients. Some questions about existing clients may include:
- Why did the client choose the firm?
- What does the client like about the firm that causes it to stay?
- Are the client and engagement still a good fit for the firm?
Engagement lettersEngagement letters document the understanding with the client and serve as the firm's first line of defense in the event of a fee dispute. The engagement letter should limit the firm's scope of services by employing words that limit its responsibility and avoiding words that expand it.
To reduce "payment resistance," firms should involve their clients in the design of the engagement letter. They should communicate their billing and payment policies during the initial client interview. Clients who balk at the fees during the interview may find it difficult to pay.
Firms should price their services based on their value in the market. Underbidding or discounting rates to win work can reduce the firm’s resources, increase the chances of shortcuts being taken, and expand the firm’s exposure to malpractice disputes.
Different services often require different billing practices. The engagement letter should spell out the fee structures, such as hourly rates, fixed fees, value pricing, refundable retainers and replenishment, or a combination of structures.
Firms should always document their expectations, including billing and payment terms, in the engagement letter. That letter, along with other documentation, can be used later to rectify selective client memory.
Additional recommended actions include the following:
- Use standardized letters that may be modified and tailored to fit each engagement.
- State estimates, if applicable, and clarify that they are not fee quotes.
- Use retainers/retainer replenishment for clients that are slow-paying, financially stressed or new to the firm. Remind clients that retainers are not an estimate of the total cost, do not earn interest, and must be paid before work begins.
- Include a stop-work clause and create a policy to enforce the clause to prevent unpaid fees from accumulating to the extent that the firm believes it can no longer walk away from the client. Without such a clause, if the unpaid fees become so large that the firm wants to sue to collect, the client may have little to lose by suing the CPA for malpractice. The legal fees incurred from the lawsuits and the billable time lost by the firm almost always exceed the fees owed.
- Include terms for fee collection. Late charges are legal but should be reasonable. Do not structure the agreement to collect "interest" since it may conflict with state usury laws. Consider offering discounts for early payment.
- Include mediation and fee arbitration clauses, which are often successful tools. Mediation is effective for all disputes, and arbitration is effective for fee disputes only.
Billing tipsIf an invoice is unclear, clients may put it aside to address later, lengthening the time it takes to get paid. Standardized, clear, concise and descriptive invoices are more likely to be paid sooner.
All professionals within the firm should be accountable for their timesheets and billing deadlines. Firms should aim to reduce their billable time by using administrative staff, with appropriate training and support, to prepare invoices and collect payments.
Timely billing leads to better collections. Consider billing more frequently than monthly, as smaller invoices may be paid sooner.
Collection tipsIt's often helpful to speak to the person in the client company who's in charge of authorizing bill payment. If a large balance is due, consider calling 10 days before the due date to be sure the invoice has been received, and request a payment date.
Collection calls are relatively effective, inexpensive, immediate, personal and informative, but they should be documented in the firm's files. Staff members need to know the rules under the Fair Debt Collection Practices Act (FDCPA) to prohibit unintentional harassment of debtors. Anger management and mediation training may help staff deal with difficult people.
Once a firm has sent out 30-, 60-, and 90-day letters, it should consider turning the account over to a professional collection agency to avoid spending more valuable time and resources. If a client offers a reasonable partial payment in lieu of full payment, take it and disengage. This frees up valuable time to pursue better clients who pay their bills on time and in full.