The Necessity of Accounts Receivable Management
All law firms have a goal to maintain a healthy cash account and are ever searching for ways to maintain or improve that cash position. The fastest way to do this is by getting paid more rapidly. The keys to obtaining prompt payment are clean billings with accurate descriptions of the services provided. Both of these pieces can be monitored by the capabilities provided through billing and receivables management software.
The next step is to establish a policy of maintaining contacts with clients when the invoices have not been paid, and most importantly to establish how the client will pay. Email notices are good, but making contacts personally or via telephone are much more effective and quicker. Email notices are usually done by a batch function , while personal contacts require a discipline that many staff members lack. It is too easy to delay when not facing the client directly. Your firm may have a group that does nothing but call clients with requests for payment. A collection clerk, if you will.
Another important area is to develop a system for analyzing the exception pool. It is very dangerous to ignore unpaid bills because they fall into an exception report. You must find a way to print those, sort them, and make systematic contacts to obtain payment, either by check or credit card. An older lawyer I used to know was asked how he knew when to make a priority loan from his savings account to pay his law firm’s obligation. "When the 4th of July fireworks began," he replied. A strong accounts receivable tracking system can often help prevent a delay of that nature.
Managing Law Firm Collections
The dynamics of the law business, its client-vendor relationship and the nature of the services it provides create a perfect storm for challenges in collections. Many times, the reduced set of legal remedies that law firms will use to collect give some struggling clients an unspoken second shot at financial survival. The problem is that by doing so, firms may unwittingly create their own cash flow problems. In variety of ways, the complexity of law firm work and the place in the economic cycle of many law firms now is giving rise to an alarming number of collection headaches. A good understanding is critical to good cash flow management.
Client Disputes Law firms often provide services that are delivered over a long period of time and involve a meaningful amount of subjective judgment by the fee earner. Client arguments over what has been done or how much has been spent force firms into difficult negotiations over bills. Clients frequently argue that fees are unreasonable because they have not seen value for the money spent. This creates a significant burden on firms, especially where the bill is substantial. Heightened collection pressure can result in strained client relationships. Recently, case law dating back to 1888 was revived and relied upon by one Court to completely deny full recovery of fees and costs because of a disagreement over when fees should start. The case sheds light on how some cases are lost on collections even after a favorable decision. Keep in mind that not all Courts accept the common reliance on the "when fees should start" argument.
Billing Structures It is not uncommon for a law firm to elect a monthly retainer, a blended billing rate or some variation of a standard hourly rate schedule. Many firms also take on matters for fixed fees, payments in installments, fees based on contingencies, and a variety of other structures. While these structures are marketed nationally, many times local market conditions force firms to adopt these terms in a too great proportion of their work. The practical result is that the firm’s cash flow becomes subject to the client’s business cycle and credit worthiness. Compounding the difficulty, many of these arrangements defer payment on the disbursement side as well. Business impact: Law firm cash flow therefore becomes the function of the client’s financial health. Late client payments become part of firm budgets and are sometimes ignored with negative results. Firms with strong collections have a significant advantage over their peers. Success in collections usually starts with an organization with mastery of its collections processes.
Maintaining Client Relationships More than in virtually any other business, the law business requires positive client relationships. Forceful collection activity can be justified, but very often the affected firm does not feel deserved to be. When firm staff have to put their professional skills to use in resurrecting a struggling account, it can sour the practice. Some partners have to take on collection chores themselves and don’t always do it well. To be most effective, good collections will require more than lip service commitment from partners and staff. It will take the right tools and resources to monitor your relationship with your clients and to place collection activities on auto-pilot. This should be invisible to your clients and will allow fighting collections fires with minimal impact on your relationship.
Best Practices for Managing Receivables
In order to avoid unnecessary losses, it is important for firms to implement efficient and effective receivable processes. Law firms can adopt proven collection strategies that reduce wasted time and costly write-offs. Implementing effective billing practices. Billing is one of the most important and effective collection strategies – and law firms need to implement effective billing practices. It is imperative for firms to produce and distribute bills in a timely manner. If you fail to bill on time, you will likely fail to collect the funds you are owed. Failing to bill on schedule will often lead to late payments or non-payments, which can be avoided with a consistent billing schedule. Establishing clear payment terms. Even with the best billing practices in place, late payments can cause your firm to lose out on significant amounts of revenue. Most of the time, clients will not complain about giving their attorney’s office a credit line, however, when they do hold you accountable for timely payments, it can be damaging. It is essential for law firms to include a written collection policy so that clients have piece of mind that there will be no surprises when it comes to receiving their bills. This written agreement can also be used to back you up, should a client become unmanageable. Written agreements regarding payment terms should include billing schedules, payment dates and an outline of the consequences if payments are not received on time. Maintaining effective collection communication. When a client owes your firm money, you may be tempted to have a fear of confrontation. The reality is that when lost revenue gets accumulated, it can become stressful on your bottom line. Your clients are often your largest assets, but at times can be your biggest liability. To avoid ending up on the losing side of an unpaid bill, your firm’s management team should implement an effective communication strategy. As soon as your team establishes that a client is going to be late on their payment (i.e., invoice payment isn’t received within 30 days of when your staff is notified of the payment, a check bounces or a credit card does not clear), the legal staff should reach out to the client to alert them of the overdue balance.
Enhancing Receivable Management Through Technology
A growing number of law firms are investing in technology in an effort to gain visibility and increased control of their accounts receivable (AR) balances. Firms are using capital that would otherwise be sent to the bottom line as a means to create process improvements, enhance reporting, streamlining the AR lifecycle and, in turn, compliance and management of this important asset. Overall, technology has allowed firms to not only better balance their receivable mix, but with greater and more effective utilization of existing resources.
The use of these technology systems and tools have been most widely focused on pre-billing and bill review processes that better manage timekeeper and client AR "mix." The Technical Architectures are state-of-the-art in their utilization of real-time tracking of time and billing data from time entry to invoice generation. These systems provide near real-time tracking of client-based expenditures and collections. The system allows for automatic warning flagging based on pre-defined triggers that can include everything from time and billing report status, timekeeper utilization and compliance with drafting and billing guidelines to actual realization and collection results and aging of client and firm AR on a daily basis. These systems are dynamic and are continuously updating as time and billing data is processed throughout the day. With regards to collections, the real-time tracking provides a true gauge of days outstanding and delinquency status along with precise balances on a monthly basis which is key to determining priorities of action on specific relationships. These tracking systems, once in place, help identify "poor actors" among either timekeepers or clients and clients with excessive write-off amounts and/or collection challenges. The delta between these "poor actors" and the remaining timekeepers and clients are easily analyzed and can be addressed early on, before collections fall into a completely unmanageable status. Having timely information allows for management to minimize the real risk of lost opportunity cost on aged receivables.
Automated warning flagging is directly tied to billing guidelines, which many firms have implemented to enhance their "Brand Image" and to establish increased levels of compliance. These guidelines have now been imbedded within the overall workflow process, and with automated warning flagging and escalation messaging, have become an integral part of a firm’s day-to-day workflow. With the imbedment of the billing guidelines, the systematic distribution and delivery of internal compliance reporting to the firm’s timekeepers and clients has become a seamless process. Since the timekeepers and clients are actively engaged in the systematic distribution of billing guidelines and enforcement of these guidelines is an integral part of the firm’s policy, the results of this process have proven to be a great success. The ability to track, quantify, score and statistically report compliance has significantly enhanced the overall compliance levels at firms and has allowed for reporting to be used as an effective "marketing" tool. In short, the use of technology throughout the AR process has now become an integral part of the firm’s productivity improvement and market competitiveness strategies.
Legal and Ethical Issues Related to Receivables
Law firms must consider legal and ethical obligations when managing their accounts receivable. Just as your firm must comply with statutory and regulatory requirements when charging clients, you also have to comply with other external sources. This includes ethical rules governing the discharge of your billing and collection responsibilities. For example, when billing for services rendered to an individual, you must ensure that the fees you charge are reasonable and consistent with the requirements of Rule 1.5 of the American Bar Association’s Model Rules of Professional Conduct. When billing a client who has insurance coverage under a no-fault provision applicable in most automobile accident cases, you must comply with applicable state guidelines such as New York Personal Injury Protection law.
Depending on the jurisdiction, the types of fees charged must also comply with relevant statutory and regulatory requirements. When representing a plaintiff in a tort action, you may not charge, attempt to collect, seek, or negotiate a fee in excess of the reasonable value of the legal services rendered, or if the client is required to pay a portion of the costs in addition to the fee, the total of the fee and costs cannot exceed a reasonable fee. Some jurisdictions, such as New York , also impose requirements restricting the liability of an attorney who contracts with an insurance agent or company for legal services. These restrictions require that a lawyer "must not: (i) pay any part of a personal injury fee to a person for referring the client, or (ii) permit a person who recommends the employment of the lawyer to be compensated or to participate in fees paid by the client, except that a referring lawyer may be compensated out of fees awarded or specified in the judgment payable to the client from any court an attorney receives. This provision shall not prohibit a partnership, law firm, or attorney from allocating liability among them in a manner consistent with the New York rules." In some of these clauses, the rules correct for this however. This type of practice is often referred to as "Champertous" arrangements. When a lawyer enters into an arrangement with a non-attorney to split fees, depending on the jurisdiction, the result may be that the fees are deemed as being ‘earned’ by the attorney at the time of entry into the agreement and that the amount to be received by the attorney does increase if the recovery increases. Your firm’s arrangement must be in compliance with bar rules, statutory authority and case law. You must review case law to see whether such arrangements have been authorized or deemed illegal and unethical.
Training Law Firm Staff Regarding Best Practices
To ensure the efficient handling of accounts receivable, staff should receive regular training. Accounts receivable management is one area that is strongly affected by a number of client components of your firm management software. Client types, billing templates, detail and summary invoices, unbilled WIP, retainers and trust accounts are all examples of components that need to be properly understood by staff. Investment in training your staff up front will reap stronger benefits down the line as staff spends less time on accounting and finance, and more time providing the type of service that keeps your clients coming back.
Another critical aspect of ongoing accounts receivable management is telling staff what to do and when to do it, and then ensuring that the staff does it. Well-written financial policies lay out the critical "when" aspect of AR management, i.e. the benchmarks for the timing of each step in the collection process. Firm financial policies should include aspects such as:
Over-arching these policies is the need to review performance. Failure to regularly review critical steps in your accounts receivable program (e.g. invoices over 30/60 days, payment plans, payment arrangements, etc) is destined to result in failure. These reviews will also help you to determine whether your policies and procedures are appropriate for your firm and your clients.
Assessing and Improving Law Firm Accounts Receivable
Most law firms are interested in maintaining strong performance throughout their organization. This means having strong processes in place, managing their team effectively and helping their staff to work much more efficiently. They’ll utilize all of these factors to help the firm maintain profitability as conditions change over time.
Identifying the metrics that determine the efficiency of the accounts receivable process is crucial. Simple reports on average days to collect from clients can be useful, but firms will also need to review unpaid billings and better assess the efficiency of the collection process. A well-managed firm will maintain close control of the accounts receivable process. This includes direct collections management and well-planned and effective utilization of working capital. Most industry measure the effectiveness and efficiency of a firm’s collection process using the formula for Days Sales Outstanding:
(The net sales for the previous year x 365) รท Receivables The objective is maintaining a predictable, high quality level of receivables and managing to this number. Simply put, a firm cannot spend money it hasn’t earned and managing receivables is the only way to ensure a firm has the cash it needs throughout the year. Firms need their clients to pay their bills in a timely fashion to maintain liquidity. The length of firm’s collection cycle will ultimately determine their profitability and with greater control over this process, they can gain additional income thanks to using receivables to fund operations . There are many variables that will affect their average collection period so firms should be persistent to ensure they maintain a manageable collection cycle. One of the best ways to do this is with good communication; firms need to constantly remind their clients of due dates or overdue invoices and follow up if they have not been paid on time. Having transparency in their receivables performance is key.
It is important to remember that accounts receivable is a transactional process that needs to be managed consistently. It is not a "problem" that needs to be "solved". The dynamics of the receivables process change over time and several factors will influence the average time to collect from clients. Both small and big changes can be nuanced and be introduced gradually at first but with time, these incremental changes can make a big impact. Some of these changes could include than introducing more formalized review and email reminders to clients, identifying trends in the data and acting on them or adopting more efficient receivables management processes. Firms are able to create a strong set of well documented standards for accounts receivable transactions and the standardization of such "best practices" can really improve accounts receivable management. With pre-agreed terms and a zero tolerance for overdue payments by clients, firms are positioning themselves as the best at managing receivables.