May 26, 2005
The Likelihood of Full Collection Decreases With Age
Since I have been on a soapbox about the 138 days (4.6 months) that the average law firm takes to bill and collect for work performed, Beth Keno shared some of her research with me. Beth Keno is a Juris representative in the Michigan and the greater Chicago market areas. Her research is in connection with a speech she will be making at a regional bar association conference.
As a reminder, the typical law firm takes 78 days to bill for services performed and another 60 days, on average, to collect that bill. In addition to excessive investment in uncollected services, long delays result in unnecessary adjustments, write-offs and bad debts. Statistics show that an invoice over 60 days has only a 70% chance of being collected in full. After 90 days, the chance of collecting the invoice in full drops to 45% and after 120 days, it falls to 20%.
The average overall realization (the percent of services rendered that actually get collected) for US law firms is 91%. 9% of the firm's revenue goes down the tubes and most, if not all, is a result of the long delay between rendering that service and collecting for it.
The 2.8 months of unbilled fees results entirely from a combination of inadequate tools and procedures, plus a lack of management discipline and enforcement. In short, you can fix it and it is easy to do. The additional two months it takes to collect the bill can be shortened, but is beyond the total control of the firm. However, one of the things a firm must understand is that if you are going to take almost three months before you bill your client, that client is not going to have a sense of urgency about paying the bill.
Speeding up payment starts with faster billing, followed by implementing procedures that create a sense of urgency for payment.
Don’t wait for bills to become past due. Have a member of the administrative staff call and confirm receipt of the bill. The engagement letter should clearly set out payment terms and provide that payment does not waive the client’s right to dispute charges later.
Invest in the right tools. Collection software will track all collection activity between the firm and its clients. That software will let you know when payment promises have not been kept. When integrated with your client accounting system, collection software will automate dunning communications, lowering cost as well as shortening collection time.
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Filed under Cash Flow Issues by Tom Collins