I recently posted some metrics that a law firm can use to measure profitability and productivity. However, all the profits don’t matter if it doesn’t translate to money coming in the door. Ideally, law and other professional services firms collect payment up front in the form of a retainer. There are plenty of examples where this isn’t possible or practical. A firm may have a major client for whom ongoing services are performed, and may submit progress billing to that client. It might be that a retainer has been expended prior to conclusion of the matter and a receivable is open on the client. For whatever reason, most law firms do have receivables and the amount and age of the receivables play an important part in the firm’s overall financial health.
Two important measures to monitor are
- Days in receivables – the amount of time elapsed between the bill date and payment date
- Unbilled receivables – this is technically not a receivable at all, but hours that have been worked that haven’t yet been billed to the client. This metric is calculated by the number of hours x billing rate for all hours that have not yet been invoiced.
One or both of these have an important impact on cash flow which is critical to any firm: new and smaller practices may be just trying to make enough to cover the monthly fixed costs and pay a reasonable draw or salary to the partner; larger firms must meet critical overhead and staff salaries.
There are several ways for a law firm to reduce receivables metrics:
- Consider moving to a 15-day billing cycle. Many law firms bill monthly. Let’s face it, it’s a pain and attorneys usually have many other things to do instead of sitting down to review billings prior to them going out. If however, a 15 day cycle is implemented and practiced faithfully across the firm, the unbilled receivables number is automatically cut in half.
- Break the billing cycle to bill immediately at the conclusion of a case, particularly if the results have been in the client’s favor. People experience a rush of gratitude for any job well done or happy results and are much more likely to pay quickly when they are billed expediently.
- Accept online payments. Configure trust management systems and accounting systems such as Xero or QuickBooks Online to work together. Take advantage of many billing systems to accept online payments via ACH or credit card.
- Accept credit cards. Many attorneys now accept credit cards. People expect to be able to use them to pay for everything. There are processors that understand the unique client trust accounting requirements for attorneys and are priced very competitively. Use one of them!
- Monitor client trust accounts and get clients to refresh them as required, in advance of depletion. For example Clio produces clear trust accounting reports that are easy to produce and monitor.
- Take advantage of electronic deposit capabilities available from your bank. When a client tells me that they have to go to the bank to deposit checks, I die a little inside.
Ask your accountant to calculate receivables metrics along with standard P&L statements to establish a benchmark. Implement one or more of these suggestions, and watch the cash come in and the receivables go down!