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Sluggish Receipts
by Barbara Lewis MBA and Dan Otto MBA

Cash flow is one of the biggest problems for businesses and can be a firm’s downfall. Nearly every business faces a situation where expenses are incurred prior to revenue collection. For example, you may rent offices and hire employees prior to billing and collecting fees for services rendered.

This sum of all these gaps across all your clients must be financed by the firm. This gap shrinks and swells over time commensurate with expenses incurred and payment schedules. A smaller gap means that the firm can generate revenues with less of its own investment. A larger gap could indicate that the firm is growing or operating less efficiently. In either case, the gap must be filled with more of the firm’s money. In general terms, smaller is better. Luckily there are several easy steps that can be adopted to control your gap.

A good accounts receivable policy can enhance cash flow. In an effort to minimize the lag between expenses incurred and revenue received, firms should obtain fees prior to beginning the work. We have found that some attorneys are reluctant to discuss fees and ask for retainers prior to starting the work. However, if a client balks at the fee discussion and retainer amount, this is a good indication of potential problems in the future. The retainer fees are regulated by the California State Bar and can only be transferred in the firm’s account as the work is completed.

Invoices should reflect the work that has been completed as well as the amount needed to maintain the retainer account at budgeted levels. Invoices for large projects with high fees can be sent twice a month, instead of the traditional once a month billing.

On many invoices that we see, there is no specific due date. Oftentimes, the due date is notated as "net 10 days." With no specific date, the payer may file the invoice in the "pay sometime in the future" file. In a case study that we conducted, we changed the invoice from no due to a specific date and found that collections were accelerated by 50 percent.

 

Most firms close their time collection for invoices on the last day of the month. By the time pre-bills are reviewed and finalized, invoices may not be sent out for a couple of weeks. If your invoices can arrive with a due date on or around the first of the month, chances are you will be paid more promptly than if the invoice arrives after the first, since many invoices are paid around the first.

Tracking your accounts receivable is critical to maintaining healthy cash flow. By aging your accounts receivable, you can monitor the amount due you that is over 30, 60, 90, 120, etc. days. When an amount rolls into the 60-day column, it requires immediate attention.

To determine the average number of days it takes you to collect on your invoices, calculate your total outstanding accounts receivable (less current A/R) and divide by current month’s billings (or a 12-month average billings), and then multiply that amount by 30. The average law firm collection days is 120, which is not healthy for any business. (This high amount indicates that law firms are, generally, not operating as efficiently as they should be, although this amount may be skewed by contingency work.)

Firms should strive for less than 45 collection days. The goal should be to continually drive down this figure. By tracking this amount and using easy to view graphs, such as Excel, you can monitor your progress in achieving your goal. These charts should be placed in a book and reviewed frequently. Your financial person should produce these reports on a monthly basis.

If the average collection day amount is more than 45 days, consider hiring a collection person. Most attorneys don’t want to collect from their clients and the result is that collections, oftentimes, are delayed. Physicians don’t dun their patients for fees and neither should attorneys.

Collection firms have employees who like their work and who professionally collect with little emotional involvement in the client. These outsourced collection people can work a day a week or an hour a week depending on the A/R status.

Some attorneys opt to sue dilatory clients; however, there are ramifications that need to be considered. According to the State Bar, over 90 percent of attorneys who sue recover their fees. Attorneys may be reluctant to sue, since this action may open the door for a malpractice counter suit. Waiting one year when the malpractice statute expires can eliminate this threat. However, your insurance company may track the number of times that you file lawsuits. Check with your insurance company to determine their policy on these matters.

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