The name of the game for most companies is cash flow. But when the economy slows, slow receivables can negatively affect liquidity.
One approach to better managing receivables — in good economic times and bad — is to effectively enforce payment contracts with customers and clients.
“There are competing factors,” says Thomas Lee, partner in commercial litigation at Taft, Stettinius & Hollister. “There is the cost of pursuing litigation and the cost of the company’s time to do that … When times are good, it’s often not as important because revenue is not as critical.”
The irony is that in bad economic times, businesses have a greater need for the money but fewer resources to enforce contracts.
Lee says there are ways to avoid contract disputes with your customers.
* Be more selective of the clients that you have and that you acquire. “There need to be controls over salespeople, who may get into contracts with people they shouldn’t. There should be some sort of review process,” Lee says.
* Request a personal guarantee from the business owner. Getting an owner to personally provide collateral for products or services may be necessary in the case of a start-up or a company on the verge of or post-Chapter 11.
“You need to know how that client is doing financially. You can find this out from trade publications, published tax liens … and other records that are published online,” says Lee.
* Build into the contract interest penalties for late or slow payment. These are enforceable, and if the contract dispute goes to trial, those amounts can be included in the monies owed.
* Stay on top of all accounts. “The best protection is to bill periodically and frequently, and keep track of what has been paid and what is owed,” says Lee. “If there is a question whether a payment is made, it complicates things.”
It is also important to make the customer aware that you know the contract has been breached.
“There’s a lot of poker playing in this,” Lee says.
Just making a phone call to resolve the issue “gives you a bigger club to wave and puts you in a better position to settle,” he says.
In any case, it’s better to handle slow or late payments in a professional rather than an aggressive way, Lee cautions.
“It is business, not personal. If you make it personal, then your judgment is impaired,” he says.
If legal action is unavoidable, there are a few options. If the contract is for less than $15,000, you can pursue action in municipal court. In municipal court, the process is quicker than if you end up in common pleas court, where a trial could take years to schedule.
“It all depends on what judge you draw and the caseload, but an average civil case can take up to two years to get to trial,” says Lee. “The strongest impetus to settle is when both parties are faced with the cost.”
In some cases, mediation or alternative dispute resolution are options. Lee says these are effective for situations in which there are genuine issues on both sides, but refers to it as “split baby results” because it is rare for an arbitrator to award everything to one party.
“Usually, if you can reach a business accommodation without involving legal counsel, you are better off. The party suffering the breach will never be made whole,” says Lee of any legal contract dispute. “In most cases, you’ll unlikely be able to recover damages with attorney fees and the time and effort.” How to reach: Taft, Stettinius & Hollister, www.taftlaw.com
Little big firm
The current economic climate may be more hazardous for mid-sized law firms than for the large firms and the smaller legal shops that surround them.
Dozens of big-name, well-established mid-sized firms have dissolved in recent years.
In the July issue of American Bar Association Journal, the cover story, titled “Caught in the Middle,” analyzes the reasons mid-sized firms have been so challenged recently.
The article explains that:
* In effect, mid-sized firms are forced to compete with both larger and smaller firms. These firms can’t duplicate the lower fees of the small firms or deal with the overhead costs of trying to keep up with big firms.
* Mid-sized firms are often more vulnerable to defections by key partners or practice groups. These firms are more likely to have a single lawyer controlling a greater percentage of the business.
* Many experts believe that mid-sized firms can thrive by developing one or perhaps a few niche practice areas. Mid-sized firms should focus on one or two areas because clients won’t believe they can do everything a big firm can do.
The American Bar Association Journal article also notes that many lawyers maintain that mid-sized firms offer the right quality of life and a flexible environment to practice law that neither larger nor smaller firms are able to provide.