The financial well-being and success of your law firm is critically dependent on a basic three-step process:
1. Finding clients and cases;
2. Doing the work well; and
3. Getting paid for your work.
Many attorneys focus on the second step, doing a good job on the legal representation. Many lawyers prefer to negotiate contracts, meet with clients, and argue their case in front of a jury. Another group of practitioners also realizes the importance of the first task, creating and maintaining a solid marketing effort. But it’s the third step that is frequently overlooked. Billing and collections is a great way to increase the profitability of a law firm.
As Arthur G. Greene wrote for the ABA several years ago, “lawyers will no longer be able to achieve financial success while operating with sloppy or ineffective business practices.” That means for your law firm to be competitive and to succeed, it must improve its billing practices and collections procedures to increase profitability.
There are plenty of lawyers out there. You, of course, are distinct and unique. You’ll show this in your messaging and the way that you interact with prospective clients. However, research shows that it costs five times as much to attract a new customer than to keep an existing one. That means a law firm can make more money serving its current clients than it can by trying to find new ones. Customer acquisition costs can quickly sink a law firm’s budget.
In the same vein, tightening up billing practices and collection efforts can also avoid spending more dollars on marketing. You’re better off with 10 good clients that pay on-time than having 20 more clients—of which half are in arrears. That would translate in to extra efforts and resources to get those other 10 to pay their bills.
Poor Billing and Collection Practices
Although most attorneys like getting paid, they don’t like asking for money. Most are notoriously slow to invoice their clients. And once they do, they like to forget about it or think optimistically that the bills will be paid promptly.
Attorneys may often delay billing for completed work far beyond when it could be billed. Time sheets and billable hours don’t get turned in, creating a backlog for the firm’s administration. But every business needs working capital to cover unbilled time, accounts payable, and other expenses. The first tip for law firms is to enforce stricter billing practices on attorneys. Simply put, if the time isn’t recorded, the firm can’t bill it. If they firm can’t bill it, they attorney isn’t going to be paid (or shouldn’t be paid!).
As a corollary, the managing partner must assume responsibility for ensuring that the timekeeping function is performed systematically and accurately. Even the most-junior associate won’t feel compelled to comply with those in the accounting department; however, when the directive comes from the top, everyone will fall in line or face consequences.
More Frequent Billing
Next, understand that the smaller the inventory of unbilled time and the shorter the time between service and billing means the greater likelihood that the legal work can be billed at full rates. More regular billing cycles in smaller amounts typically results in larger fees overall.
A firm can identify clients and open matters that aren’t being billed regularly and provide the managing partner with those cases where unbilled time and costs exceed a predetermined threshold. Those matters should be given extra attention and heightened awareness.
To implement a better and more efficient collection process, determine the scope of the problem. Many firms are oblivious or unknowing of the issues concerning their billing process. Instead of merely reviewing a bottom line report, management should gather data about client and billing activities and analyze this information.
Next, try to uncover the cause of the collection issues. There may be gaps identified from what is believed to occurring or should be happening… and what’s actually the case. This could include problems with the billing process itself (as discussed above), a lack of detail on attorney time sheets, misinformation about the firms billing policies, too many clients with financial issues, or lengthy disputes over charges with clients. It will probably be a combination of several factors.
A common cause of collection issues is the attorneys concern of losing a client because they were asked to pay their bill. This can mean frequent billing reductions, adjustments, and write-offs. This should also be analyzed—most of the write-offs could be coming from just a handful of attorneys who need better tools and resources for client billing and dispute resolution.
Look at your collection resources and determine if you need more or different staff, better technology and reporting, and deeper analysis. Finally, after a thorough review, communicate your findings. At this point you have the information you need to address the problems and put in place a collection process that is more effective and better serves the circumstances of your law firm.
On-going monitoring and analysis of billing and collections will show firm management potential at-risk client accounts, cross-selling revenue opportunities, and how best to measure the effectiveness of the process.
It’s essential for law firms to review their policies and procedures to determine how they can increase their overhead and improve cash flow.
Better billing and collection policies are two areas that can result in greater organizational efficiency and more revenue for the firm.