Minimizing Write-Offs and Maximizing Profits
Law firms cannot escape uncollectible fees and unrecoverable costs. Fees and disbursements that are not paid by a client have a direct effect on the firm’s profitability. Most service industries report income based on the cash method of accounting. As a result, income is recorded only when received. The only bad debt expenses will be the result of client costs that cannot be recovered. Any fees that are billed but not paid by the client represent lost income.
Set Expectations Upfront
There are many ways law firms can minimize lost revenue. One is to set client expectations at the outset of a case. Billing for legal services will vary for different types of law. Regardless of the type of legal service, the client should be made aware at the start of the case of what the fee structure will be. In most cases, fee arrangements are specified in a fee agreement. As an example, fee agreements in personal injury cases should include the percentage of the settlement that will be the lawyers’ fees. Clients should be made aware of hourly rates and the estimate of how many hours will be required for the law firm to complete the work that will be billed by the hour. Clearly, it is impossible to guarantee the time required, however setting some realistic expectations at the outset of the case will maximize the collectability of the fees incurred.
Value Your Time
Timekeeping is the single most important component of revenue for most law firms. Timekeepers should enter their time into the firm’s legal billing system as soon as work is completed. Time entry needs to be easy and efficient. Timekeepers need to spend their time practicing law and not stumbling with clumsy methods or software packages. There is a direct correlation between the ease of entering time and the timeliness of recording billable hours worked. Additionally, the recovery of client costs has a direct impact on the profit of a law firm. Client costs need to be entered into the legal billing system as they are incurred. It is easy to record hard costs paid by credit cards or soft costs from photocopy machines or postage. Any costs incurred on behalf of client work and not billed to the client will reduce the profitability of the law firm.
Timely Invoices Are Key
Collectability is directly related to the timely presentation of invoices for fees and costs to the clients. The efficiency of the billing process has a direct effect on collectability. The time required to prepare the client invoice must be as short as possible. There should be a process for pre-bills to be approved and finalized in an efficient manner. This will ensure that the fees and costs presented on a client invoice are current. Clients will resist paying fees presented many months after completion of tasks, so lawyers should bill clients for services and costs on a periodic and timely schedule. Monthly invoices should reflect current transactions and any prior unpaid amounts.
Invoice presentation has a major impact on collections. Client invoices should be easy to understand, clearly showing what the client owes. If clients do not understand the bill, they will delay payment or even ignore the invoice completely. The client should be presented with different payment methods. Now, more than ever, it is easy for law firms to take payments by credit card, direct deposit, or by check. Many firms have found that the easier it is for clients to pay the invoice, the faster the firm is paid.
Reduce Rejections During Billing Submission
Many law firms are required to submit their bills through electronic billing services such as Tymetrix, CounselLink, Passport, and Open Invoice. Doing so presents the law firm with many challenges. Because the bill is processed multiple times by a computer, fees and costs are reduced based on billing guidelines the client has instructed the billing processor to use. In order to try to reduce what is rejected during the bill submission, firms should pay attention to these guidelines.
Often, firms will learn the types of fees and costs that will be rejected and create data entry rules and checks that are performed prior to submission. There may be specific UTBMS codes that are consistently rejected or words in the explanation that are flagged and rejected. These patterns should be identified and noted to reduce the amount of rejected or unpaid fees and costs. Code sets by client are useful in limiting rejections during bill submission. Bills submitted electronically often have specific rules related to the frequency of billing. Knowing these requirements is imperative to ensure maximum recovery of fees and costs. A process should be followed to resubmit rejected items in a timely fashion. Failure to do so creates lost revenue for the law firm.
For many law firms, asking for money can be very awkward. However, the more time that passes between the billing date and the collection of that invoice, the less likely it is that the payment will be made. Some firms charge interest to increase the likelihood of a payment being made, and therefore shorten the payment cycle. Any invoice over 60 days should be identified and the client should be contacted. Standard collection policies should be identified and followed. Allowing receivables to age will affect the collectability of fees and costs.
Reports that show new billings separate from outstanding collections will clearly represent firm profitability. Understanding timekeepers’ realized rates will help manage profitability. Giving timekeepers better tools to record and track time, setting expectations, and managing the billing process and receivables will all contribute to increased revenue for the law firm.
About the Author
Deborah J. Schaefer is a Certified Public Accountant in Connecticut and New York, who specializes in the selection, implementation, training, and support of computer-based accounting systems for law firms. Practicing for over 35 years, she has worked with hundreds of firms across the US and internationally. Prior to starting her own firm, Deborah worked in the computer audit and consulting divisions of several national accounting firms in New York and Boston.