Is your Law Firm Losing Time Where it Shouldn’t?

Dimitri Raziev26 Oct 20224 mins
Is your Law Firm Losing Time Where it Shouldn’t?

High Opportunity Costs

In 2020, the average hourly rate for legal services in the United States was $300. In January 2022, this rate rose to $313 according to the latest Clio “Legal Trends Report”. Depending on experience and location, the average hourly wage in the UK can exceed £300

The truth is, while law firms are working hard to provide quality service to their clients, not all clients are paying their bills as fast as they receive the service. For a number of law firms, this results in:

1. The negative impact on cash flow and the ability to pay for staff and other expenses required to sustain and grow their operations

2. Difficult follow-up conversations with clients to chase down late payments that may negatively impact the client relationship

3. Enormous time spent following up on (and trying to reconcile) payments, as opposed to serving additional client needs or building the firm’s book of business 

The opportunity costs are enormous and are paid by law firms of all sizes, whether it is a prominent legal corporation or a small family-owned practice. 

According to a recent Byfield survey, cash flow was identified as a top concern for legal managing partners. Additionally, according to a Clio survey, 25% of law firms lost money due to unpaid invoices during the pandemic.

Keeping expenses under control is the first part of effective cash flow management. The second step is to convert your sales into cash quickly. Let’s look at how to expeditiously convert your Accounts Receivable (AR) into cash, and improve your cash flow.

Friendly Reminders

A timely reminder is an obvious but often overlooked strategy for addressing a law firm’s cash flow issues. In the working relationship between a client and a lawyer, trust is a fundamental value. The client should have the impression that the attorney is trustworthy and always on their side. Therefore, it is essential to approach a customer in the appropriate manner, tone and time when reminding them of their overdue bills. 

Timely Invoices

Law firms of all sizes have a lock-up period of around 155 days, which includes unpaid bills and work in progress. Additionally, a Citi study found that law firms’ billing circles have grown by 11% over the past year. Sending an invoice as soon as work is finished is the first step in reducing a law firm’s billing cycle. 

Just as important is the need to discuss the numbers before (and while completing) the work so as to be transparent and not surprise your client with an unanticipated amount on an invoice.

Occasionally, clients may hesitate to pay invoices on time because they lack visibility into the costs of the legal services being provided. Increased transparency, as well as a discount for early payment, is one option that might be especially useful for small customers. Although the discount won’t significantly affect your law firm’s revenue, it will greatly improve your cash flow.

Evergreen Retainer

Law firms are certain about their costs nearly every month. However, it is difficult to anticipate the amount of incoming cash due to late payments. Stopping the provision of credit-based services is one option that can help alleviate this uncertainty. Instead, upfront payments can be collected by the firm. The term “Evergreen Retainer” refers to this widespread practice.

A trust called an “Evergreen Retainer” accepts a predetermined sum of money from clients. The money in a trust will later be used to pay for the law firm’s services. The “Evergreen Retainer” is refilled whenever the amount of money falls below a predetermined minimum threshold. Additionally, an account can be refilled in a variety of ways. The client has the option of topping up the “Evergreen Retainer” in one lump sum, or through a regular payment plan that both the client and the law firm agree upon.

Using this strategy can help to minimise the time spent chasing down some clients for late payments, but may not work in all cases – particularly where a client has a relatively low demand for continuous legal services. 

Credit Control

Even if your law firm sent out invoices on time and provided clients with a variety of payment options, this does not guarantee that your Accounts Receivable (AR) are low. Your assets hold the money that has been billed but not collected on the balance sheet as AR. It is still an asset, but it does not assist you in covering salaries or other costs. This variable needs to be carefully monitored and dealt with, and it can be expensive to hire a competent credit controller for your firm.

So, how are other law firms working to address this challenge? Through the use of modern A/R technology designed to meet the needs of the industry.  

Cloud-Based A/R Technology for Law Firms

As outlined in the latest  Clio “Legal Trends Report”, there are endless benefits for law firms that choose to leverage cloud technology. It starts with better client relationships (88% of respondents who use cloud technology versus 55% who don’t) and ends with better salaries (52% versus 49%). 

Cloud software like Clio is a great tool for legal practices to manage and grow their firm, including tools for client intake, case management, document management, time and expense tracking, and a whole lot more. 

Additionally, AI-based technologies which complement and are compatible with Clio can make accounts receivable management easier. Through such software, law firms will be able to:

1. Keep their businesses healthy, by automating manual tasks and expediting the invoice to cash process to get paid faster

2. Keep their clients happy, by using AI and machine learning to identify the right timing, channel and tone to best communicate with your clients and provide a frictionless payment experience for your customers

Interested to learn more? Kolleno is here to help! Book a free consultation here with one of our legal credit control specialists