Cash is the life blood of business, including law firms of all sizes. I have worked with billing in and around various professions and businesses, including law, for over 30 years. It is odd that attorneys, particularly those in smaller firms, are reluctant to collect money, even when the work has been done. Cash needs to collected as soon as possible, because firm expenses are normally due within a month or for payroll, sometimes even sooner. Taking out a loan to pay regular expenses because clients have not paid for services rendered is bad business practice and puts unnecessary financial strain on your practice.
Cash Crunch
The data needed to determine if you have a collections problem lies within your amounts owed from clients or accounts receivable (A/R) information. Either your practice management system or accounting system should generate a report with the age of all the amounts owed by each client (Aged A/R).
Current: most recent amounts billed in the last month.
Over 30 days: the previous month’s bills that remain unpaid after 30 days from the end of the last month.
Over 60 days & Over 90 days: unpaid bills from two months and three months ago, respectively.
Start with the totals in each of the above four columns and then examine each individual amount by client starting with the oldest bills. Also determine how much of each month’s billings must be collected within 30 days to cover the upcoming month’s expenses. Below is a brief example on the first month of a firm’s operation:
New firm first month billings $25,000
First month expenses $23,000
Budgeted monthly profit $2,000
A/R owing after 30 days $5,000
Based on the above, because only $20,000 of the first month’s billings were collected ($25,000 billed less the $5,000 A/R still owing), there is a shortfall to pay the $23,000 of expenses. In other words, an additional $3,000 will have to be borrowed to pay the first month’s bills. Going forward, if the practice bills $25,000 per month on average, only $2,000 (or 8%) can remain uncollected each month so that enough cash is available to run the business. Each month, check the aged A/R list, and if any amount is over 30 days unpaid, consider reviewing your cash collection and billing processes.
Billing and Collection Process
The challenge of collecting cash is not unique to the law. That is good, because there are best practices to use. Also, no fancy technology is required to analyze your processes. Map out how you bill and collect using a white board, paying particular attention to any bottlenecks or follow-up procedures. Many attorneys have a timely billing process, but fail to create a routine to collect. In addition, if you experience a cash shortage yet do not have large overdue A/R amounts, look at your work-in-progress or time tracked but not yet billed amounts. Perhaps you are leaving amounts unbilled for an extended period of time.
Billing and Collection Tips
- Bill when the matter is complete. Do not wait until the end of the month to run a bill for a completed matter.
- Regularly review your work-in-progress or unfinished matters. Each week look over your matters for potential billings.
- Set reasonable payment terms. Invoices should be due upon receipt and if possible fees collected upfront.
- Use retainers and consider evergreen retainers. Each month’s bill can then be immediately paid using the retainer, keeping the A/R balance at zero. Check into whether your state bar rules allow for the retainers to be automatically replenished as “evergreen” retainers.
- Set fixed, subscription, or flat fees and collect upfront. For some firms, this means setting new pricing, but clients appreciate certainty and it simplifies billing and collection.
- Accept checks plus credit cards, Automated Clearing House (ACH), and online payments. Make it simple for your clients to pay online and otherwise as fast as possible.
- Assign follow-up responsibilities for client money or set time in your calendar every week. Delegate collections to an administrative assistant or office manager because your time is best spent practicing law.
On the last point, while collections provide the cash to run your practice, delegating or outsourcing these functions may be the most efficient and effective way to stay cash positive. Other business ideas that can assist with cash flow include:
- Join a referral network where as much of the referred work as possible is based on flat fee or retainer.
- Explore legal plan work, for example, LegalShield, where the collections are done by the company, not the firm.
- Outsource difficult collections to experts who can follow-up for you.
Law school teaches us to think like a lawyer, which works for practice but not for administrative tasks. Instead, think like a business person and be creative. Remain client-centric but be prepared to change your processes to accelerate collections. Look at changes and experiment with new ideas, but remember to always check the data to see the impact of your new process.
About the Author
Mary Juetten is the founder and CEO of Traklight, a cloud-based platform for tracking and protecting intellectual property, and is the co-founder and managing director of Evolve Law, a membership organization of legal entrepreneurs focused on innovation and the future of law. Contact Mary on Twitter @maryjuetten.