GOOD CASH FLOW management means managing payments and collections to increase control, reduce costs and maximize the use of your money. Reviewing your cash flow can reveal a lot about the financial health of your firm, including:
- The profitability of the firm as a whole or of a particular practice area, client or matter.
- The firm’s overall rate of return.
- Problems with a firm’s liquidity.
- The financial risks associated with a new practice area or other initiative.
Inconsistent billing practices, long delays on accounts receivable and languishing WIP (work in process, i.e., work that has been completed but not billed) can wreak havoc on a firm’s finances.
ESTABLISH GOOD BILLING AND COLLECTIONS PRACTICES
Good billing and financial management practices can help you to reduce receivables and eliminate or drastically reduce your collections. As always, review your jurisdiction’s ethical rules before implementing new practices.
First, require that clients pay something up front. By doing so, your clients demonstrate their commitment to the matter. Next, don’t wait until your retainer is exhausted before securing additional funds from the client. Ask clients to maintain the original retainer balance by paying for disbursements and work performed on a monthly basis. Use the retainer for the last payment and refund any remaining funds to the client at the end of the engagement, or request that clients replenish the retainer at strategic points when a large portion of the work will be done (e.g., before depositions, 30 days before trial, etc.).
Accept credit cards or electronic payments to reduce administrative time and headaches. Send clients an electronic bill that allows them to pay online, or obtain the client’s agreement to charge his or her credit card within a specified period of time after the bill is sent if no objection is lodged.
Send bills at the same time each month and be consistent. Even if you receive payment up front, send regular statements so that clients can see the work being performed on their behalf and the status of their retainer or advance payments.
Send bills that clearly state what was done, by whom and why, the fee charged, the payment due date, the outstanding previous balance, the remaining retainer balance and how payments can be made. Don’t use legal jargon. If clients can’t understand what your bills say, they will not want to pay them.
Include your contact information on every bill and the name of the person to contact about billing questions or discrepancies. Consider offering a discount for early or on-time payment to encourage prompt payment.
Establish procedures to automatically follow up with clients for unpaid amounts, whether they represent work already performed or additional advance retainer funds required. Include email, regular mail and telephone follow-ups. Some of these functions can be performed by staff, but sometimes the fastest way to determine whether there is a problem and to obtain payment is to have the attorney handling the file contact the client. If permissible within your jurisdiction, advise clients in advance and in your retainer agreement that if funds are not received timely from the client, work will be stopped on their matter.
BE UP FRONT WITH CLIENTS ABOUT BILLING PRACTICES
Good billing practices begin with the initial consultation with the client and a frank discussion about fees. Many clients’ complaints about legal bills arise out of surprise or lack of understanding of the original agreement rather than a true objection to the work performed or the fee.
It is your job to ensure that your clients understand, acknowledge and agree to your billing practices before any work is performed. If you’re hesitant, unsure or unclear about your fees, the method or timing of payment or other terms, clients will not take your fees seriously.
Don’t rely solely on your retainer agreement to communicate billing and collections basics to clients; review them in your initial consultation so that you can answer any questions, clear up any misconceptions and identify clients who are unwilling to pay. Discuss how your fees will be calculated, what the bill will contain, when clients should expect to receive bills or statements, and when and how they will be expected to pay. Don’t be afraid to let clients voice their objections. It is better to lose a potential client who is not willing to pay for the work required than it is to take on a client who fails to pay after the work has already been performed.
Clients don’t like surprises. While it may not always be possible to quote a fee for the entire matter up front, even litigators can provide an estimate or budget for clients. The key to doing so effectively is to be clear about the scope of the project and identify variables that might affect the fee. Be clear about what services are, and are not, included in the quoted fee.
For example, variables that might increase the fee are: a client who is not cooperative; if the adversary fails to obey court orders, necessitating motion practice; or if additional witnesses are identified after the original fee is quoted. Identify these at the outset and immediately advise the client of any changes in scope when they arise, before the work is performed or the bill is sent.
FOLLOW THROUGH AND BE CONSISTENT
If you can’t be bothered to send your bill on time, why should the client pay on time? Bills should be sent regularly (preferably monthly), at the same time each month, in the same format. There are many good billing programs on the market that can help automate this process, reducing the length of time between completion of work and the time the bill is sent.
Keep tabs on bills that are not sent or matters in which no activity was performed to ensure that they do not signal a problem that should be addressed immediately with the client. Don’t hold bills because you’re afraid to tell a client that a mistake has been made or the firm has failed to deliver what was promised. Avoiding these kinds of difficult conversations for fear that the client will be angry (or possibly file a grievance) only makes them worse.
Don’t let contingent matters fall through the cracks. Conduct periodic reviews to ensure that actions are taken to move cases toward resolution. Require monthly progress reports to the client; these reports will highlight matters that require attention.
REVIEW KEY FINANCIAL INDICATORS REGULARLY
Key financial indicators help you spot (and correct) problems early, develop an understanding of the ebbs and flows of your practice areas and plan for leaner times. Create reports that provide a financial snapshot of your firm and review them regularly, including:
- WIP (work done but not billed).
- Accounts receivable and aged accounts receivable (work billed but not yet collected).
- Total billings and collections.
- Write-downs and write-offs.
- Unbilled disbursements.
- Realization (rate actually collected versus rate billed).
- Utilization (percent of time actually billed).
- Actual versus budgeted costs.
- Leverage (ratio of nonpartners to partners).
- Billable hours.
- Client trust account balances.
- A profit/loss summary.
Finally, in addition to reviewing key indicators on a firm, practice area or client basis, you should also conduct individual matter cash flow reviews. In order to improve future matter management or identify red flags that would signal a potentially problematic matter (or client) for which representation should be declined in the future, evaluate the following: the cost of providing the service; the hours expended, billed and realized; the amount of the retainer; the number of times the retainer needed to be replenished; and the length of time it took to receive payment on the matter.
By establishing and implementing good billing practices, improving client communication about billing and collections, and reviewing key financial indicators, you will have a better handle on your firm’s cash flow in the coming year.