Debt collection is one of the least glamorous and most crucial steps in law firm profitability. Collection is a critical part of what is widely known in the legal industry as “the ‘docket-bill-collect’ treadmill to profitability.”
Collecting receivables is the part people don’t always like to talk or think about, but it’s one of the mainstays of a profitable law firm.
Without that final stage, the hard work of the lawyers and support teams involved on a particular file can go to waste.
Generally, you want to have captured your time accurately to bill and collect all the fees that you’ve earned, as well as the expenses that you pay out on the client’s behalf.
By the time an invoice has been outstanding for 60 days, it can begin putting a strain on company bank accounts or lines of credit since the client’s debt is effectively being financed by the law firm.
And when the clock ticks on to 90 days, studies show there’s a dramatic drop in the chances of ever collecting those outstanding funds, excluding special circumstances such as estate sales where funds are more secured . This is why we urge law firms to take a proactive approach to collections.
Lawyers should focus their attention early on and stay on top of things up front. Put in some internal checks and balances as part of a protocol to maintain a healthy cash flow, optimize profitability, and prevent aging receivables.
We generally find that lawyers have different approaches and comfort levels when it comes to chasing after clients for payment. But there are some basic principles upon which the foundations for a sound collections protocol can be built.
1. The first thing that you need to be sure of is that your lawyers or timekeepers are accurately documenting their time and disbursements on a daily basis at the appropriate hourly rates.
2. Secondly, you have to communicate well and often with clients and aim to bill them at the end of each stage of work so that you’re not plowing ahead with work without getting bills out.
That’s a path to what’s known as ‘bill shock’ for clients who are landed with one huge invoice at the closing of the file or the end of a calendar year, when they could have been paying more manageable amounts as they went along.
This is part one of Cosgrove Associates look at collections. Stay tuned for part two which delivers tips for avoiding lost billings.