Financially Legal

4 Steps to Effective A/R Management

Posted by Emery Wager on May 2, 2020
Emery Wager

Managing accounts receivable is important when times are good. But when times are tough, how effectively firms turn accounts receivable into cash can be the difference between going under and thriving.

Expert law firm financial consultant, Chelsea Williams of Core Solutions Group has an excellent video outlining four tips for effective accounts receivable management. Below is a summary, but we highly recommend checking out the video.

1. Clear it up on the first date

Transparency early in the relationship is important. Clients should know how they can pay, when they can expect an invoice and when they need to pay that invoice. Firms should also be clear about what happens if payments aren’t received in a timely manner. All of these items should be outlined before work begins.

 

2. Cover your butt with your pricing

The key is getting paid as early as possible, preferably before the work is actually done. One way to do this is to move to a flat fee structure. Since most states allow flat fees to be recognized as earned upon receipt, firms can deposit these fees into their regular business operating account before starting work.

Another option is to accept advance fee deposits or retainers. If firms continue to request advance fee deposits ahead of the billing cycle, managing accounts receivable becomes just an exercise in moving funds between bank accounts once earned.

Finally, firms should consider charging for initial consultations. There is value in providing free consultations, but lawyers who have done their homework and developed their niche are generally providing significant value in these initial consults. Charging for consults reduces potential time-wasters and allows lawyers to invest more into these initial meetings.

 

3. Don't just be a bill

One of the biggest complaints law firms face is lack of communication. Clients want to know the status of their case. What are the latest updates? Silence is disconcerting. If an invoice is the only communication the client receives, that client is likely not going to be excited to pay it.

Firms should put a communication process in place so clients understand the work being done, the value the firm is providing and the latest updates to their case.

 

4. Take yourself seriously

Despite best efforts (and multiple reminders), some clients will be slow to pay. For these clients, firms should put a process in place to enforce payment timelines. Chelsea recommends creating a 30/60/90/120-day process where each stage involves a standardized playbook. Here’s a sample process:

30-days: Send a reminder and charge a flat late fee.

60-days: Send another reminder and let the client know you are going to stop working on the case.

90-days: Send a letter of intent to collect. Chelsea outlines some helpful language in the video, but in general, don’t be accusatory. Ask the client if they are getting your invoices. Let them know you want to make sure their outstanding bill doesn’t get sent to collections. Ask them to reach out to discuss alternative payment arrangements, and finally let them know that if you don’t hear from them by a specific date, you will send their balance to collections.

120-days: Send the client a note letting them know their outstanding balance has been sent to collections.

Work billed does not automatically equal cash in the bank. Reducing the time it takes to collect by implementing these simple changes is one of easiest ways to improve a firm’s financial health.

For more more details on accounts receivable management and other insights about managing your firm’s finances, check out this video or head over to Core Solutions Group.

 

 

Topics: Firm Financials, Key Performance Metrics

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Financially Legal is a twice-monthly podcast on the finance and economics of entrepreneurial law firms and lawyering. Host, Dan Lear, talks with law firm leaders, academics, business professionals (both in and outside of law) and thought leaders to provide compelling and provocative content at the intersection of finance, economics, and law.

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