Law firms often experience financial leakage in their billing and collections processes. If you think you’re doing everything right, you’re bringing in business, you’re working hard, and your clients are happy with your services, but your cash flow still isn’t where you’d like it to be, what can you do about it?
It may be time for a complete review and audit of your billing and collections processes to determine where leakage may be occurring.
A billing audit looks at the practices, processes, and documentation associated with your entire billing process. This includes:
As you look at each stage of the process, ask questions about what is working and what isn’t working in each area. Is this an area where leakage is occurring? What could be improved? Brainstorm ideas about how to solve the problems identified at each stage. Understanding where losses typically occur can help law firm managers address and mitigate these issues effectively.
First, do a review of your rates and fees. Is it time to raise your rates? Some sticker shock or resistance to fees is normal, particularly for clients who have never worked with a lawyer before. But if you never receive any pushback from clients on your fees, they may be too low.
Resist the urge to immediately offer clients a discount if they are uncomfortable with your fees. Have a discussion with your clients about their expectations and about the value that you add to the engagement. If you make a habit of discounting your rates, clients will assume that they were inflated in the first place. If you discount your rates for one client, word may get around, and that client’s referrals may also expect a discounted rate.
The scope of the engagement can significantly impact your fees, particularly if you do not charge by the hour. Are you correctly anticipating the scope of matters and setting an appropriate fee, or are you frequently adding to your fees mid-engagement due to a change in scope? If the scope of the engagement has changed during the representation, are you immediately communicating that change to the client and adjusting the fee appropriately? If you did not correctly anticipate the scope of the matter, should you adjust the fee or take a larger up-front payment for similar matters in the future?
During your fee and rate review, also consider whether you take up-front payments from clients, and whether those payments are sufficient, or should be increased. Also, think about when it might make sense strategically to offer a client a discount (perhaps for early payment) or to charge interest or fees for late payments.
Evaluate the payment options you offer to your clients. Implementing online payment systems can expedite payments and improve cash flow. Ask clients if there is anything you can do to make it easier for them to pay. Consider whether there are other payment options you could provide clients with that might help them pay faster (for example, credit card, mobile payment services or payment plans).
When billing by the hour, a major area of potential leakage is the firm’s (and individual biller’s) timekeeping practices. Failing to create billing entries and accurately record time contemporaneously as the work is being performed almost guarantees leakage. Timekeepers who do not record their time as work is being performed are much more likely to forget to bill for tasks, or to inaccurately estimate the time it took for them to complete tasks.
Another potential area of leakage is timekeepers deciding on their own to reduce the amount of time they bill for a task, thinking that perhaps it took them too long. Doing this is not only a form of leakage, but it denies the supervisor or partner to see how much time was actually expended on the client’s matter, and to provide some guidance to the attorney or staff person doing the work if necessary.
Writing off time and tasks before the bill gets sent to the client gives the client a false sense of the amount of time that was expended on the client’s behalf. Much better would be to include the entire amount of time spent on the bill and allow the billing partner or supervisor to indicate some of that time as “no charge” on the bill.
If you are consistently writing off time or tasks before the bill gets sent to the client, why do you think the client shouldn’t pay for all the tasks performed or all the time spent? Are write-offs being done routinely across the board, or only for specific timekeepers? Are your attorneys and staff performing unnecessary work? Do you need to provide more training or change staffing of certain matters? Are your attorneys and staff working productively? Is there software or other technology that can improve productivity and reduce write-offs?
Technology can vastly improve timekeeping and billing practices if the firm is using updated software and technology. For example, timers and mobile billing apps can help lawyers keep track of their time and billing entries contemporaneously, even if they are not working in the office or at their computer or laptop, helping them to capture time and tasks accurately.
Leakage may occur if attorneys and staff are not using these technologies consistently, are not fully trained on the use of these technologies or if the billing and collections software does not integrate well with the rest of the firm’s software and accounting programs. These are additional areas to explore in your audit. If your staff is resisting the use of technology, find out why. Is the system not intuitive enough? Is more training needed? Is the process too cumbersome? Can you create templates or shortcuts to make it easier and faster to create billing entries or invoices?
Check for accuracy and timeliness of bills. Are bills being sent consistently and timely, or is there a delay in sending out bills to the client? The longer it takes to bill the client after the work is done, the less likely the client will pay. Memories are short; even satisfied clients might forget how grateful they were for the work you performed or the result you obtained when the pain of their problem is a distant memory. If you don’t send bills consistently and on time, why should the client pay consistently or on time?
Do some investigation when you identify leakage coming from timekeeping or billing practices. For example, if bills are not being sent timely, what is causing the delay? Are attorneys not reviewing pre-bills in a timely manner? Is there a shortage of staff? Is your billing software insufficient for your needs?
How well you communicate with your clients about your fees and billing practices can significantly affect your cash flow. Are you transparent in your discussions about fees? Review your billing policies and procedures with the client at the initial consultation and let them know how and when to expect to receive your bill, as well as when and how they are expected to pay.
Bills should include sufficient detail to ensure that the client understands what work is being performed, by whom, and why. Provide clear instructions on who the client can contact for billing questions. Use these conversations as a chance to learn what clients need to understand your invoices and your billing practices and how to improve, as well as to reinforce the value you provide to the client.
During your audit, review your internal communication as well. How well do the attorneys and staff in the firm understand the expectations about how they keep and record their time, how billing entries should be worded and structured, and how to talk to clients about billing and collections issues?
Once you’ve sent out your bill, the ball is in the client’s court. If your clients don’t pay on time, that hurts your cash flow.
As part of your audit, look at how quickly your clients pay their bills, what methods of payment they prefer, and how often clients question, cut, or refuse to pay your bills. Regularly review your accounts receivable aging reports to identify patterns. Identify the clients who are chronically slow payers or who refuse to pay portions of your bills, as well as the types of matters that generate the most billing issues.
There could be several reasons why your clients don’t pay their bills on time. Perhaps the client is strapped for cash or can’t afford your fees. Or maybe the client wasn’t expecting the bill when it arrived, or the bill contained some surprises. Perhaps the client did not receive the bill, or it got caught in a spam folder. Try to determine the root cause of the problem so that you can address it. Creating consistent follow-up and collections procedures to ensure that the bill was received, to provide clients with reminders, and to answer questions clients have about the bill can help address these problems.
If you continue to have problems with clients paying your bills, consider whether you are taking on the wrong kinds of clients or the wrong kinds of work.
Once you have conducted the audit, share the findings with stakeholders in the firm, identify areas of improvement, and make a plan for implementation. Determine what areas you will address first and how you will address them, identify what additional training is needed, where processes should be updated or changed, and whether there are technology solutions you should explore to improve your cash flow and make the billing process easier for both the attorneys and staff in your office and for your clients.
