Written By Devon Thurtle Anderson, CEO of Financial Consulting Firm, Skepsis
When I first left my law practice to become a law firm bookkeeper and financial strategist, I was shocked to discover how many law firms struggle with cashflow. Even more surprising was that this struggle isn’t just limited to a few seemingly rag-tag solo general practice firms. To the contrary, when I had a chance to look under the hood at dozens of law firms’ books and financial records – including law firms I had always seen as hugely successful – I learned that almost every law firm has a cashflow problem within any given 12-month period. So, as part of my bookkeeping and consulting services, I set out to change that.
Today, we’re going to change that for your firm, too. And we’re going to do it without any financial reports or financial mumbo-jumbo. Instead, we’re going to focus on simple strategies you can implement today to see immediate improvement in your firm’s cashflow. We’ll also discuss how to modify those strategies to improve your firm’s cashflow even in times of famine, like COVID.
Get More Money In The Door Today: Collect Past Due Payments
The easiest and quickest way to begin improving your law firm cashflow is not to work more, or raise rates, but instead, to deposit money you’ve already earned. So, start your cashflow turnaround by implementing an effective collections process with the following key elements:
- Automated past due reminders. Most legal billing software can automate this for you.
- Follow-up phone calls. If the initial automated reminder doesn’t work, then it’s worth a phone call to the client. A good collections call comes no more than a few days after the automated past due reminders, and seeks to establish the following: (1) the client received the invoice; (2) there are no objections to the content of the invoice (ie, there’s no fee dispute); (3) offer to take payment by credit card immediately over the phone; (4) offer an automatic payment plan, and again, take the card for that payment plan immediately over the phone; and (5) if the client still does not pay, a committed payment date. If payment is not received by that date, follow up with another phone call.
- Offer to suspend the client’s case. This is a clever way to temporarily fire your client for non-payment, and it has become particularly important in the era of COVID, when our clients expect empathy and understanding. You can be your client’s hero by generously offering to “suspend” the case as a courtesy. When the client is financially ready to proceed again, your firm gets the client back; and in the meantime, the client feels that the firm has been looking out for the client’s well-being, rather than focusing on the firm’s own pocketbook.
Pro Tip: Sometimes, as attorneys, we can’t suspend a case because it may cause a client’s rights to lapse. In that situation, offer to suspend the entire case except for the rights-preserving action (eg, timely responding to discovery requests, or timely initiating an administrative process), and negotiate a pre-paid flat fee for that limited scope of work.
- Check-in proactively. Don’t wait until a client is 60 or 90 days behind in payment to check in with them. Especially in the era of COVID, a quick phone call or email along the lines of the following can go a long way: “I noticed you came up on my late payment list today. My assistant will be in touch on that, but I wanted to check in and make sure everything is okay and see if there’s anything I can do to help. Please let me know how you and your family are doing during all of this.” You might be surprised by the responses you receive from this proactive, client-centric approach.
- Start by contacting clients that are the least delinquent. Clients with the least delinquent bills and smaller payment amounts are more likely to pay. Start with those clients to start getting cash in the door right away, and then once you’ve honed your collections process a bit more, move to the bigger (and older) fish.
- It’s a collections routine, not an on-demand ATM. Collections processes that are reactive, running only in times of famine, are simply not effective. Implement a routine that cycles monthly and do your collections “yoga” routinely each and every month. Not only will this improve your firm’s cashflow, but it will also improve your firm’s collection skills (improving cashflow even more), and also gently, but effectively, train your clients in the importance of prompt payment.
The important takeaway here is: When collecting from clients, turn your collections mindset inside out. It’s not about squeezing firm money out of clients. It’s about the client and their situation, and what you can do to help them solve their payment problem creatively and cooperatively.
Minor Tweaks To Your Billing Process Can Lead To Major Rewards
Now that we’ve collected on several past due accounts, let’s turn to ways we can get that money more easily in the next cycle.
- Online credit card payments are critical. If you’re not familiar with the staggering statistics demonstrating, time and again, how effectively an online payment provider can decrease average client payment lags, then you’ve likely been living under a rock. Gravity Legal and others offer secure and easy-to-use online payment portals proven to lead to quicker, and often higher, payment rates.
- Invoice monthly, within the first week of each month. When clients don’t receive an invoice for two or more weeks after the billing period closes, your firm sends the message that receiving client money just isn’t a priority. And if receipt of payment isn’t a priority to you, your client certainly won’t make issuing that payment a priority. Do what you need to do to get firm invoices out the first week of the month, every month.
- Invoices should show a due date, not “due on receipt.” It’s true that you are not your client’s financier, and so clients should pay you quickly. On the other hand, most clients, just like most attorneys, are deadline driven. List a specific due date on each invoice to make the payment deadline a no-brainer for the client.
More clients will pay if you make it easy for them, and you’ll see the returns in both improved payment rates and happier clients.
Work Paid Hours, Not Billable Hours
A common mistake that many attorneys make is “working ahead” of client funds. When cash is scarce, it can be easy to dive into billing as much time as possible to get the cash flowing in. But your billable hour is worthless unless it’s paid, so structure your work strategy to maximize paid hours, not billable hours.
- If a client is late in paying – even by a day – do not continue to do any more work than you have to. Once a client gets behind in payment, it becomes less likely that you will receive payment. So you’re only spinning your wheels by continuing to bill on that client’s case. At the beginning of each week, check your caseload’s A/R. For any client that is delinquent, hold off on as much work as you can until payment is brought current to ensure you’re not just digging your firm, and your client, into a deeper A/R hole.
Pro Tip: There’s a theme here: We’re turning law firm collections inside-out to make it a client-centric process. When we bill on that delinquent case, we’re piling more debt onto a client who may, or may not, be able to bare it. Do your client a favor, and give them what may very well be some much-needed financial breathing room.
- Encourage or require auto-pay. Think for a minute about how much time and brainpower auto-pay saves you each month. Your clients want the same convenience from you, and most states’ ethics rules allow auto-pay, so give your clients what they want. Then, instead of sitting around waiting for client payments each month, you can simply dip into their accounts and take payment (after giving clients a reasonable period of time to dispute any charges). Now, collections is suddenly looking more like that ATM you always wanted it to be.
Use Your Trust Account The Right Way
No, I’m not talking about ethics rules here – I’m talking about financial business savvy. Attorneys have held funds in trust as a standard practice for decades. But many attorneys rarely stop to think about why we require trust deposits from clients, and how to use trust funds effectively. The purpose of trust funds has traditionally been to provide the firm with “insurance” for client non-payment. But, to keep that “insurance” in force, the trust account needs to stay adequately funded.
- Require evergreen trust deposits. An “evergreen” trust deposit is one that has to be replenished to a minimum threshold when the balance falls below that threshold. If you use trust deposits, you should make them all evergreen. Most legal billing software coupled with experienced law firm bookkeeping can make trust replenishment nearly automatic. This keeps your “insurance policy” from lapsing.
- Calculate trust requirements strategically. Too many attorneys, when asked how they set their trust deposit thresholds, explain their thresholds are based on “what sounded reasonable,” “what the client could pay at that time,” or “what my old firm did.” Stabbing in the dark is not an effective financial strategy. Instead, each client’s trust deposit should be strategically calculated to cover your firm’s fees for 1.5 times the average amount you plan to bill in any single month. This keeps your “insurance policy” funded.
- Don’t outdrive your trust headlights. In other words, don’t work ahead of your trust deposit. If your client is required to maintain $5,000 in trust, then do $5,000 worth of work in a month and stop. Better yet, stop and bill the client so they get the opportunity to get caught up. Just like we mentioned with the past due payments, the practice is the same here: Don’t spin your wheels billing time for which you may or may not get paid. If you find you’re exceeding the trust deposit for multiple months, it’s set too high and needs to increase. Keep your own exposure within the limits of that trust “insurance policy.”
The purpose of trust deposits is to make sure the attorney gets paid. But those deposits are ineffective if not used strategically.
And That’s Just The Tip of the Iceberg
This article focuses on simple steps to immediately open the valve of cashflow for your law firm, but there are many other simple strategies you can implement to break it wide open. Once you’ve mastered the income side of the cashflow equation, consider other angles of attack, from building up firm “rainy day” reserves (without picking your own pocket), to an “expense diet” that can be quite surprisingly simple and painless to achieve. Robust law firm cashflow is rarely intuitive or even logical, but it is absolutely within your firm’s grasp.
Devon helps law firms make positive financial decisions that save both time and money.
After running her own law practice in Washington, Oregon, and California for over 15 years, Devon has put her firm management expertise to work helping attorneys ease the administrative burden and improve their bottom lines with bookkeeping and strategic financial management. Her whole-firm approach includes helping firms
manage their trust accounts and maintain complete RPC compliance in all aspects of their financial record-keeping and funds management.
Get in touch with Devon at skepsistech.com