We recently read the 2007 Law Firm Economic Survey from LexisNexis, and in particular the component on “Improving Cash Flow Cycle Time and the Impact on Partner Income: How to Have a Record Year.” We know we keep beating the drum about how critical the cash flow cycle is, but from the survey it’s apparent that some very businesslike law firms are not as businesslike as they could—or should—be regarding the entire cycle. This is unfortunate because the linchpin in firm profitability is to convert intellectual effort in the form of legal services into that oh-so important asset named cash.
Let’s get to the numbers to show why managing the cash flow cycle is so critical, and then we’ll discuss ways to get improvements going in your billing and collection efforts.
The “Law Firm Business Model” presented in the LexisNexis survey (at page 55) paints an interesting picture. Of the firms surveyed, those ranked in the top fourth had 93 percent of their worked hours billed, versus 87.2 percent for the firms in the bottom quartile. The comprehensive billing realization in the top quarter of firms was 93.6 percent, versus 80.4 percent in the bottom quartile. Number of days fees were outstanding was 72 in the top fourth, versus 110 days in the bottom group. And total cash flow cycle time in days was 155 in the top quartile, versus 192 in the bottom. Furthermore, the survey report states that “a firm with $12MM fee revenue a year is likely to have $4MM to $6MM in receivables and WIP at any given time.” That’s quite a considerable sum! (Learn more about the survey, which covers benchmarks in midsize firms, at http://juris.com/jurispublic.)
The business case can be easily made that firms can be doing a better job of tightening their cash flow cycles. To help in that regard, enter the office administrator. While lawyers are, understandably, busy generating all that intellectual effort, the administrator can, and should, be in the pilot’s seat in setting up and running financial systems to ensure that intellectual effort is duly—and quickly—converted into bills, which are then converted into cash. There are several systems that are vital in this regard. Let’s deal with each in turn.
Setting Client Expectations
Every law firm should, as a matter of course, specify in the initial engagement agreement how and when the client will be billed and how soon thereafter the firm expects to be paid. In addition, the editors of the LexisNexis survey had an interesting tip that is well worth passing along. They recommend that in the initial agreement you insert the name and contact information (including the e-mail address) of the person in the client’s accounting department to whom the bill should be sent for payment (with a copy to the person who handles the file for information purposes).
Even cleverer, they also recommend inserting the name and contact information of the person to be contacted by the firm in case of a missing payment. By inserting this directly into the initial agreement, you emphasize to the client that the firm expects to manage the collections process in a businesslike way from the get-go—and that you’ll take the necessary action if there’s a payment problem.
Collecting Billing Data
A billing system’s integrity depends on the immediate input of accurate information about time worked and services provided. Accordingly, all time-billers in the firm should be expected to hand in their time records at least weekly (if not daily). The records also should be checked for proper spelling and grammar and appropriately worded for clarity. Remember that the phrase “garbage in, garbage out” applies to business processes, too. If you expect your accounting and administrative staff to maintain a streamlined billing process, ensuring that your time--billers’ data is as correct as possible will go a long way toward meeting the goal. (For more detailed advice in this area, see the ABA book How to Draft Bills Clients Rush to Pay, 2nd Edition, by J. Harris Morgan and Jay G. Foonberg.)
Also invaluable in this regard is making good use of technologies to capture time—from voice recognition systems that allow dictation of time records directly into billing programs, to case management applications that take notes about tasks, telephone calls and meetings and convert them into time records. And don’t forget PDAs and cutting-edge tools such as Element 55 (www.element55.com) that help automatically capture time as well.
Converting Data into Bills
Let’s face it, lawyers hate billing (the process, that is, though not the results). Fortunately, with appropriate oversight, many items in the billing process can be delegated to accounting or administrative staff—who, it should be obvious, can do these tasks more cheaply while freeing the lawyers to practice law, so everybody wins. First off, you will want your office administrator to set up a billing schedule that ensures statements are sent out at least monthly. We also strongly advise setting up a system to generate pre-bills that are checked to ensure they are compliant with client needs and expectations before they are ever sent to the responsible lawyer for review. Once checked by staff, pre-bills should then go to the lawyers for immediate review.
A system with the appropriate review process and turnaround times will (1) greatly increase the odds that corrections need only be made once, after which the actual bills can be sent directly to the clients and (2) help tighten up the time between when work is completed and payment is collected.
The LexisNexis survey editors make several other excellent suggestions for improving the billing process. For new clients, for example, test the recipient’s e-mail and e-bill formats before sending out that first bill, to avert delays in cycle time. (Remember asking in your initial agreement for the e-mail address of the person to whom bills are to be sent?) Another suggestion is to insert in your fee agreement and on the face of the bill itself that paying the bill does not waive the client’s right to dispute the account. The goal of this is to eliminate “hold-backs” on any account that a client may be unhappy about—and it builds trust between the client and the law firm, which is an important component of a loyal relationship.
Administering the Collections Process
The survey editors also make a number of points about improving the collections process. First, they recommend that while you run the A/R statements that are sent to clients monthly, you also run them separately from the billing cycle. Additional pointers include the following:
- Obtain from each client particulars about how and in what format they wish to be billed—and regularly ensure that your administrative staff complies with these requests.
- Establish a policy that once an account reaches a certain stage (say 45 days overdue) collection staff within the firm phones the client to discuss the resolution of the bill. Ensure that your fee agreement allows and your office policies enforce, within the constraints of your jurisdiction’s rules, that all work ceases once the client slides into an over-45 day A/R balance.
- Establish an A/R committee to review accounts over 60 days and empower the committee to decide further steps to be taken on those accounts. All too often when only the lawyer responsible for the client’s work is reviewing the client’s A/R, the account simply slides further into default. Having a process that involves others in the firm ensures that the firm actually does something about the account, whether it be to pursue collection efforts, fire the client and write it off, or take other action.
Reporting Lawyer Performance
This is perhaps the least-attended-to part of the system, but it may be the most important one in terms of achieving incremental improvements. Providing regular and timely information to management and lawyers on the entire billing process (and how to shorten the billing cycle) starts a “knowledge loop” that helps everyone within the system learn and grow by giving them the feedback, and incentive, necessary to improve.
Accordingly, you want to produce reports for both firm management and the lawyers on how well those within the system are performing. Track metrics such as A/R balances, days of unbilled fees, days of fees billed but not collected, and fees billed by lawyer, client and area of law; fees collected by lawyer, client and area of law; and effective hourly rates by lawyer—all shown in comparison with the goals that you wish to achieve. Remember, if you don’t know where you are going, any road will take you there.
If, however, you put your firm on the right road with properly set up and managed systems, your billing and collections processes will lead to happier clients, greater cash flow and extraordinary financial results for all. And who in your firm wouldn’t be happy with a record year in income?