5 Ways to Fix Poor Law Firm Cash Flow

Dimitri Raziev12 May 20224 mins
5 Ways to Fix Poor Law Firm Cash Flow

It is a known fact that the lawyers’ hour is among the most expensive. In the US the average hourly rate for the lawyer’s services in 2020 was $300. In the UK the average hourly rate can go as high as £300 depending on the level of experience and location. The law firm’s cash flow and more importantly the revenue is facing incredible opportunity costs when trying to chase the clients to pay their bills.

It doesn’t matter if the law firm is a large legal corporation, or a small office consisting of a couple of lawyers. Making the cash flow timely and efficient means more time the lawyers can spend on their core job functions. Below we discuss the top tips and tricks that can help your law firm fix the cash flow challenges.

The pandemic has been a wake-up call for many businesses. Some have had to adjust their business model and some understood that they need to fix the occurring problems immediately. For example, the efficient operation of the law firm is extremely dependent on the cash flow. The survey by Byfield has found that 85% of law firms’ managing partners thought that the cash flow issues were among the top problems during the pandemic.  Moreover, during the pandemic, 25% of law firms are forfeiting revenue due to unpaid invoices according to the survey by Clio.

Part number one of effective cash flow management is keeping expenses under control. The second part is to turn your sales into cash as quickly as possible. If the invoice is outstanding, it means your lawyers have given legal advice on credit. Let’s examine how to improve your cash flow and turn your Account Receivables (AR) into cash as quickly as possible.

Evergreen Retainer

Almost every month the law firms are certain about their expenses. However late payments make it hard to predict what the incoming cash will be. One of the options that help to change this uncertainty is to stop providing services on credit. Instead, the law firm can collect payments upfront. This is a quite popular practice and the term is Evergreen Retainer.

Evergreen Retainer is a trust where a client deposits a certain amount of funds. Later the firm will be using the money in a trust to pay for the law firm’s services. Once the level of funds falls below an agreed minimum threshold, the Evergreen Retainer gets replenished. There are several ways to replenish an account as well. The client can top up the Evergreen Retainer as a lump-sum payment or a regular payment plan that the law firm and a client agree on.

This approach ensures that the cash flow will definitely come in and will save time chasing some clients for payments. However, this approach is more suitable for large clients with regular and continuous needs for legal services. If the client’s demand for legal services is rather small, it would be harder to agree on such a payment arrangement. It would require classic credit control.

Timely Invoices

The lock-up (unpaid bills and work-in-progress) for law firms of all sizes is 155 days. Moreover, the Citi research has found that the billing circle of law firms has lengthened by 11% in the past year. In order to reduce the billing circle of the law firm, the first task would be sending an invoice right away after the completion of work. Usually, it takes several weeks to send an invoice. However, nothing stops the law firm to change this practice internally. Secondly, in order not to surprise a client with an unexpected amount on the invoice, talk numbers before the start of your work.

Sometimes the client underestimates the costs they might spend on legal advice, thus hesitating to pay the invoice on time. Another option that could especially suit small clients is a discount for early payment. While the discount won’t affect your law firm’s revenue so much, it will improve your cash flow incredibly.

Credit Control

Even if your law firm has prepared an invoice in a timely manner and offered several ways for the clients to pay the bills, it still is not a guarantee that your Accounts Receivables (AR) are low. The money that is billed but not collected is sitting on the balance sheet as AR in your assets. While it still is an asset, it does not help you pay salaries or other expenses. It is important that this variable is carefully monitored and dealt with. Hiring a good credit controller for your law firm can be costly.

Thanks to modern technology there are solutions that can be outsourced in the most time and cost-efficient way. Kolleno is a SaaS platform, which can serve as an extension of your business software. It will be helping your law firm to collect overdue invoices. 

Friendly Reminders

Quite an obvious but not always executed point when fixing the cash flow problems of the law firm is a timely reminder. Trust is a fundamental value in the working relationship between the client and a lawyer. The client should feel that the lawyer is always on his/her side and is reliable. So, when it comes to reminding a customer about the overdue bills, it is essential to approach them with the right tone of voice and at the right time. Making such decisions also should not be the responsibility of the lawyer, as it will make future work awkward.

Removing the Pain

This dilemma can easily be solved with Kolleno – our AI-based technology compatible with Clio. On your law firm’s behalf, our AI-powered software will approach your client regarding the late payments using the most appropriate and friendly tone-of-voice, via the most convenient communication channels, and will help your firm to decrease Days Sales Outstanding (DSO).