Improve Your Law Firm’s Cash Flow in 2022
Running a law firm is no small task. In law school, you may have thought you’d spend your hours writing pleadings and arguing in court. Now you know better. Building a successful firm means dealing with office space, technology, marketing, recruiting, finances, and more.
You’ve also learned your law firm’s finances are about more than your firm’s fees. They’re about your billing processes, trust accounts, expense tracking, and getting invoices paid. Unfortunately, a reality we hear every day is most law firms aren’t getting paid.
On average, the collection rate—meaning the number of billable hours firms collected divided by those invoiced—was 85%, according to the 2018 Legal Trends Report. By 2020 that rate only marginally improved. The 2021 Legal Trends Report found law firms’ average collection rate was only 89%.
Like most firms, you might think imperfect accounts receivable (A/R) rates are simply a cost of doing business. But we urge you to reconsider that stance and ask yourself,
“What can we do to capture that missing 10-15%?”
You don’t have to accept losing money as the status quo. Instead, you can face your law firm finances head-on. You can ask the tough questions, like whether or not your firm could have better billing practices. You can admit when there’s room for improvement, and in that space, take steps to do better.
If you’re ready to do just that, read further about common law firm billing challenges and how to overcome them.
Weaknesses in traditional billing practices
The status quo prevents many law firms like yours from adopting innovative tools. But we’ve already concluded the status quo may be losing you 10-15% of your invoices.
To minimize losses, you have to think critically about your current billing practices and their negative impact on your firm. This isn’t an exercise in blame but instead a time for honest reflection.
Ask yourself these questions:
Are you relying on manual processes?
Be honest about your current billing practices. Manually overseeing A/R usually means:
- Mailing or emailing invoices
- Monitoring invoice due dates and late payments
- Scheduling recurring and installment payments
- Sending reminders to clients
- Processing payments
- Making bank deposits
- Resolving disputes
Depending on your payment options, your clients might still pay in cash or send paper checks, which forces your team to travel and deal with bank deposits. If your staff does everything by hand, then you are not leveraging readily available automated solutions and there’s exponential room for improvement.
Does your team face a high invoice volume?
The sheer volume of invoices and collections burdens your staff. As a result, you may have to hire additional team members to tackle the process, or worse, accept delays when a small team can’t do it all month after month. Unfortunately, a higher headcount doesn’t lend itself to efficiency or a better rate of on-time payments, and it increases your costs of doing business.
If you’re a growing law firm, the volume of invoices can overwhelm your staff, no matter how organized it might be. Not to mention the challenges of 2020-21 have led to a higher demand for many legal services and remote methods of conducting business. Can you honestly say your billing processes and staff are ready for more clients and invoices?
Are you worried about billing inconsistencies?
A fundamental truth of law firm finances is that consistent and flexible billing processes are vital to both on-time payments and client satisfaction. Ask yourself, do you have transparent billing policies you communicate to clients upfront? Does your team stick to those practices every month?
Unfortunately, manual tasks and a high volume of invoices hinder your finance team. Both issues make it harder and harder to remain consistent. In turn, your staff may send invoices late or forget to send timely reminders.
Does your staff need to work onsite?
Remote work exploded in popularity in 2020. Most professionals who can complete at least some of their job duties outside the office want the option to do so.
But hybrid work options may not matter for finance professionals who must go into the office to deal with billing. They can’t work from home when billing and collections systems run on server-based technology or payments come in the form of paper checks.
Are you frustrated with revenue leakage?
Leakage can result from several missteps. One is your attorneys fail to capture billable work, and another is your clients fail to pay. The 2021 Legal Trends Report said the average realization rate—the number of billable hours invoiced divided by the number of hours worked—was 84%. Along with the 89% collection rate we noted earlier, those figures look decent, right? Wrong.
Let’s do some math. An average of 16% of billable hours are unrealized, and 11% of invoice payments are missing. Let’s say you have 10 associates who each bill an average of 140 hours per month at a rate of $300 per hour. Their monthly invoices amount to $420,000. Yet, what if you don’t collect 10%? Your firm could lose $42,000 in a month or over half a million dollars in a year.
Has A/R stunted your cash flow?
When your clients don’t pay or send payments late, it harms your firm’s cash flow. That can make it difficult to pay competitive salaries, bonuses, taxes, and overhead expenses.
Also, if your team relies on manual tasks and spreadsheets, it’s not easy to forecast your cash flow. Combine poor reporting capabilities with a significant percentage of clients failing to pay or paying late, and you’ve got new challenges. It becomes difficult to budget accurately, leaving you ill-prepared to cover future expenses and take advantage of firm growth opportunities.
Are your billing practices leaving clients unsatisfied?
Whether your clients are happy doesn’t exclusively result from the quality of your legal work. If only. Instead, client satisfaction has to do with the consistency of your communication, whether you adequately set and meet their expectations, and whether you offer a transparent, convenient, and smooth billing process.
When your clients deal with billing problems, restrictive rules, or complicated processes, it can annoy or confuse them. Ultimately, these issues hurt their relationship with your firm and damage your reputation in a competitive market.
Let’s take a look at client expectations around payments
Your clients are just another group of consumers, and we can find out a lot about consumer preferences. Survey results and data overwhelmingly tell us consumers want online payment options. They want paying their bills to be as easy and convenient as shopping online, with credit card travel miles and cashback rewards being a familiar perk.
What do we mean by online payment options? We mean debit and credit cards, electronic checks, and Automated Clearing House (ACH) payments that facilitate easy transactions using the client’s bank account information. You can think outside the box, too, and accept payments through third-party payment services like Abacus Payment Exchange, QuickBooks, PayPal, Google Pay, or Apple Pay.
The Fiserv Eighth Annual Billing Household Survey found most households use multiple offline, online, and mobile payment methods.
- 71% of consumers reported higher satisfaction when given multiple billing and payment options.
- 65% of consumers reported higher satisfaction when they could view and pay their bills at their bank’s site.
- 66% of consumers said receiving electronic bills increased their satisfaction.
- 36% of consumers were less likely to switch to a competitor if they received an electronic bill.
The 2021 Legal Trends Report shows us consumers prioritize convenience when paying their law firms: 66% said online payments were their top choice, followed by a tie between automated payments (61%) and mobile-app-based payments (61%). While direct interaction is essential for communicating about a legal matter, it’s far less important when handling invoices and payments.
The 2020 Legal Trends report also uncovered only 73% of firms offered clients the ability to pay electronically. Now, given the upheaval in recent years, that percentage has improved by necessity. But it’s not close to 100% yet.
Are you part of that percentage holding out? If you use paper invoices or send emails without electronic payment options, you’re not in line with consumer expectations. Yet, it’s easier than ever to adopt e-payments, and you’re running out of excuses for putting it off.
What can you do about your law firm’s billing problems?
You can topple the status quo. If your firm struggles to keep up with invoices and A/R, the solution is an automated billing solution like Abacus Payment Exchange (APX).
Abacus Payment Exchange addresses your billing weaknesses through:
- Time tracking
- Customizable invoices
- Customizable schedules for automated messages
- Customizable emails and push notifications
- A central messaging interface
- E-payment options
- Speedy payment processing
Basic features of A/R automation software ease many of your staff members’ manual tasks and give your clients what they want: consistency and convenient payment options.
Is automation worth it?
Yes. Hands down, billing automation has the potential to improve your A/R. The B2B Payments Innovation Readiness Playbook by PMNTS and American Express reported 49% of businesses experienced lower delinquency rates after automating their A/R processes, and 62% benefitted from improved Days Sales Outstanding (DSO). The average payment term for companies with automated processes was 23 days compared to 28 days for businesses lacking automation.
Are you ready to get paid faster? Learn more about APX today.