Law Practice
May 26, 2001
Sluggish Receipts
Cash-flow problems can be a law firm's downfall. Nearly every firm faces a situation where expenses are incurred before revenue collection. For example, you may rent offices and hire employees before billing and collecting fees for services rendered.
Cash-flow problems can be a law firm's downfall. Nearly every firm faces a situation where expenses are incurred before revenue collection. For example, you may rent offices and hire employees before billing and collecting fees for services rendered.
This money gap shrinks and swells over time commensurate with expenses incurred and payment schedules. A smaller gap means that the firm can generate revenues with less of its own investment. A larger gap could indicate that the firm is growing or operating less efficiently. Generally, a smaller gap is better.
Luckily there are several easy steps that can be adopted to control the gap between your income and your expenses.
A good accounts-receivable policy can enhance cash flow. To minimize the lag between expenses incurred and revenue received, firms should obtain fees before beginning the work. Some attorneys, however, are reluctant to discuss fees and ask for retainers before starting the work. However, if a client balks at the fee discussion and retainer amount, this is a good indication of potential problems in the future. Remember, however, that the retainer fees are regulated by the California State Bar and can only be transferred in the firm's account as the work is completed.
Invoices should reflect the work that has been completed, as well as the amount needed to maintain the retainer account at budgeted levels. Invoices for large projects with high fees should be sent twice a month instead of the traditional once a month billing.
Many attorneys use invoices with no specified due date. Often, the due date is noted as "net 10 days." With no specific date, however, the client may file the invoice in the pay-sometime-in-the-future file. In a case study that we conducted, we changed the invoice from no due date to a specific date and found that the change accelerated collections by 50 percent.
Most firms close their time collection for invoices on the last day of the month. By the time pre-bills are reviewed and finalized, invoices may not be sent out for a couple of weeks. If your invoices arrive with a due date on or around the first of the month, chances are you will be paid more promptly than if the invoice arrives after the first because many invoices are paid around the first of the month.
Tracking your accounts receivable is critical to maintaining a healthy cash flow. By aging your accounts receivable, you can monitor the amount due you that is more than 30, 60, 90, 120, etc., days old. When an account rolls into the 60-day column, it requires immediate attention.
To determine the average number of days it takes you to collect on your invoices, calculate your total outstanding accounts receivable (less current accounts receivable) and divide by the current month's billings, or a 12-month average billings. Then multiply that amount by 30.
The average number of days it takes law firms to collect their fees is 120, which is not healthy for any business. This indicates that law firms generally are not operating as efficiently as they should be, although this collection gap may be skewed by contingency work.
Firms should strive for less than 45 collection days. By tracking your collection lag times with easy-to-view graphs such as those available in Excel, you can monitor your progress in achieving your goal. These charts should be placed in a book and reviewed frequently. Your financial person should produce these reports on a monthly basis.
If the average collection-day period is more than 45 days, consider hiring a collection person. Most attorneys don't like the process of collecting from their clients, and the result is that collections often are delayed. Businesses that specialize in collection have employees who like their work and who can collect professionally with little emotional involvement in the process. And these outsourced collection people can work anywhere from a day a week to an hour a week.
Some attorneys opt to sue dilatory clients. There are, however, ramifications that need to be considered. According to the State Bar, more than 90 percent of attorneys who sue recover their fees. Attorneys may be reluctant to sue, however, since this action may open the door for a malpractice countersuit. Although waiting one year to allow the malpractice statute to expire can eliminate this threat, your insurance company may track the number of times that you file lawsuits. Therefore, determine your insurance company's policy on these matters before you sue your client.
Barbara Lewis and Dan Otto are partners with Centurion Consulting Group, which assists law firms with operations, finances and marketing. They can be reached at www.centurionconsultinglaw.com.
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