Legal Firms: How Late Payments Destroy Your Cashflow

Dimitri Raziev17 Jun 20224 mins
Legal Firms: How Late Payments Destroy Your Cashflow

Late payments are often guilty of business failure, and research brings incriminating evidence. According to the Small business index in January 2022, 30% of business owners have seen late payment of invoices increase over the last three months, with a further 8% experiencing other forms of poor payment practice. Late payments are among the reasons for poor legal firms’ cash flow health. Numbers are alarming among law firms, and the money owed has reached unprecedented levels. 

Your Accounts Receivable are Responsible for Cash Flow Bleeding

Accounts Receivable (AR) correspond to outstanding revenue for unpaid legal services you have nevertheless invoiced. In your books, these late payments appear as “accounts receivable”. Outstanding Accounts Receivable spare no one, and it is the most common phenomenon for businesses, no matter their field of expertise or size.

According to the 2018 Legal Trends Report, the average law firm only collects about 85% of its invoiced amounts. Smith & Williamson’s analysis of the Top 50 law firms’ accounts, covering the period 2016-2017, indicates that clients owe over £5bn to law firms and an unbilled work amount to £2bn. It takes about four months for your firm to receive the payments… when you receive them! Research led by the US Census Bureau brought by The Accounting Minute demonstrated that 26 per cent of invoices are uncollectible after three months. After six months, this percentage increases up to 70 per cent. Eventually, from twelve months, you can bid farewell to your money as this percentage rises to 90 per cent.

Late payments can quickly get out of control and cause your business to bleed money. Regular expenditures like payroll and taxes can soon outpace revenues without sufficient cash flow. 

An Aggravating Factor for Your Working Capital 

By not pursuing a 0 AR policy, money can get tied up in the balance sheet’s accounts receivable entry, which greatly strains your working capital. It affects your ability to expand, improve liquidity, increase profitability or respond to challenging economic conditions like during Covid or looming stagflation.

The pandemic has significantly impacted the legal sector: data from the SRA shows that the number of regulated firms decreased by 1.9% between December 2019 and December 2020 (from 10,278 to 10,080); 426 new law firms opened while 539 firms closed. Legal Aid firms have struggled the most, with over 70 closing since April 2020. In the pandemic context, with the continued reluctance of banks to lend, lengthening billing cycles has a nefarious effect on law firms’ health. 

Faster Collection Does not Mean Spoiling the Customer Relationship

Despite this incriminating evidence summoned by numbers, too many law firms carry a high AR because they fail to enforce an efficient collection protocol. Why would firm managers choose to accept unpaid invoices as a cost of doing business instead of addressing the issue and optimising their collection procedures? 

Firm managers who consider outstanding AR as an inevitable casualty in their business succumb to two common fallacies: time fallacy and customer relationship fallacy. 

Time fallacy: it is undeniable that collection processes consist of repetitive and time-consuming tasks. Lawyers should spend their time and resources on the added-value functions for which they are qualified.  

Customer relationship fallacy: collection processes can take a toll on your relationship with your clients. 

A Stitch in Time Saves Nine

Let’s address the time fallacy. Nobody said manual collection processes were easy or fast. It is an exhausting and repetitive task that can negatively impact lawyers’ morale and productivity. No lawyer is looking forward to chasing payments every week. But who said collection should still be a manual process? Automation dramatically reduces the time invested in these time-consuming tasks. 

With Kolleno’s intelligent credit control solution, outsource your credit control and get paid five times faster without a headache. Focus your resources on strategic and added-value projects and positive customer interactions, and save time for what truly matters: helping your clients. 

The hour you think you’re saving today will cost you a week in the long run (and endless headaches) by not tackling late payments as soon as you can. 

The Revolution of Friendly and Mindful Collection Processes 

What about your customer relationships? How can we help you maintain positive interactions while collecting rightfully due fees from your clients? Debt collection suffers from a bad reputation. Forget the stony debt collector in a mackintosh, holding a briefcase and sending hate mail. Kolleno’s platform is powered by various tone-of-voice and message templates to mindfully approach your clients. You can either accept the suggestion or modify it. The efficiency of following-up processes greatly depends on personalisation. Whether due to financial difficulty, disputes, or simply negligence, it is essential to gather as much data as possible on late payments, to maintain healthy and trustful relationships with your clients and avoid any misunderstanding.

Kolleno finds the best time, channel, and content to reach your clients and adapt to every one of them. Using artificial intelligence and machine learning, Kolleno gets to know your clients and adjusts to them. Moreover, the technology estimates the best timing to send reminders. Also, the algorithms will find the most appropriate form of communication and the perfect tone of voice. We meet and anticipate your every need. 

That’s how Kolleno tackles both time and customer relationship fallacies. Clear time on your schedule. Shift your focus towards your legal work and keep your whole clientele satisfied. Accelerate your cash flow and decrease your aged debt.