October 18, 2005
Speeding Up Law Firm Billing and Collection
Speeding up Law Firm Billing and Collection.
Shortening the billing cycle and speeding up the collection process can have a dramatic positive impact on distributable income to the owner/partners. While every law firm is different, the average firm has 78 days of unbilled work. On average, it takes an additional 60 days to collect fees once they have been billed. That is 138 days from the time services are performed until payment is deposited in the firm’s bank account—slightly more than 4½ months. Reducing the lag time in half would free up cash for distribution equal to 2¼ months of fees!
There is more. With faster billing, adjustments will decline since a large number of adjustments can be attributed to disputes over work done 4½ months ago. Client appreciation for work declines with the passage of time. Attorneys also tend to make concessions in exchange for a payment promise. Lower adjustments increase margin and that means a permanent, year after year, increase in per-partner income. Likewise, bad debts decline. Those who wait the longest for payment are the ones left trying to drink from the well after it has gone dry. The moral is "get your money as fast as possible," including up front.
Steps to speed up billing often result in other indirect financial benefits, including increased productivity (utilization) from better time tracking methods, lower overhead due to increased accuracy and improved administrative practices, greater client satisfaction with the firm’s billing and communication process, etc.
Use the checklist below as a guide for reviewing and improving your billing and collection procedures to speed up billing and collection.
Checklist for Speeding up Billing and Collections
-Negotiate trust deposits and/or prepayments together with minimum trust deposits
-Agree on billing frequency-monthly or every two weeks.
-Use cycle billing. Assign specific clients or billing attorneys to a 4- or 5-week cycle. This spreads out the workload and evens out the cash flow.
-Set the billing period to end one to five days prior to the billing frequency. For calendar month billing, consider billing from the 26th through the 25th. Receipt of your bills will better match for typical corporate and individual bill paying procedures.
- Document payment terms in the engagement letter.
- Get agreement on late payment penalties.
- Agree as to E-mail or E-bills vs. paper bills—promote e-mail vs. paper bills. You will get payment faster while eliminating postal delays, postage cost, paper and expensive administrative handling.
- Identify the person to receive the bill (for business clients, mail to Accounts Payable or the case contact’s assistant with an “information only” copy to the case contact).
- Identify the person to contact to confirm bill receipt and payment schedule.
- Agree that on-time payment does not waive client’s right to dispute charges.
- Negotiate progress payments.
- Invest in the right tools for timekeepers and insist on zero tolerance that billable information has to be tracked and reported as worked.
- Get time in on schedule, daily, weekly, etc. This discipline needs to be a job requirement, period.
- Fee earners should be expected to submit time to accounting accurately with correct spelling and grammar. In short, editing should not be required.
- Go mobile with PDA devices, like the BlackBerry®.
- Use time tracking software that turns your e-mails, appointments and calls into time entries without the need to reenter.
- Use time tracking software that passes time entries directly to your billing system once the timekeeper deems them to be complete and correct.
- Administration must be thorough and accurate in new matter setup, get it right from the start (use software that automates much of the handling once a client is properly set up, i.e., prices automatically handling exceptions for you, pre-audits entries against engagement rules, produces multiple bill copies to multiple addresses for different purposes, e-billing, etc.).
o Verify the name and correct address for the payment copy of your bill, i.e., the person who will pay or process payment.
o Verify the correct address for an information copy of your bill, for example for corporate clients, send an “information only” copy to the decision maker (or case contact person) while the payment copy is sent directly to Accounts Payable.
o Set up the billing frequency (and cycle) as agreed upon.
o If bills (and/or information copies) can be e-mailed or sent using E-billing, set up for automatic electronic issue of final bills with correct e-mail address and/or E-bill formats
o Set up the correct rate (and exceptions). schedules for fees.
o Set up the correct rates (and exceptions) for expenses.
o Obtain from the engagement agreement or your client any “billing exceptions or rules” and have compliance rules set up in your billing system to avoid rejected bills and adjustments
o Set up special billing notes in the "remarks" on the matter¾add these to your prebill format.
o Select the appropriate bill format¾do they want detail? Do you need a timekeeper recap?
o Obtain the correct e-mail address and phone number for collection calls¾wherever possible, calls should go first to Accounts Payable or the decision-maker’s assistant or secretary vs. the decision maker or case contact.
- Test e-mail addresses and E-bill formats before the first billing!
- Have the accounting area plan ahead¾prepare a calendar of dates to run bills considering week-ends and holidays. Make it a priority and get it done.
- Run your A/R statements monthly but separately from the billing cycle.
- Have your prebill formats set up to give the billing attorney all the information they need when reviewing the billing:
o ITD fees billed, expenses billed
o YTD fees billed, expenses billed
o Last payment amount, last payment date
o Trust balances; Prepaid balance
o A/R aging
- Do not run prebills for clients with A/R-only balances¾run only those that need actual review prior to sending.
- Run prebills (draft bills) on colored paper so they stand out and are easy to identify.
- As with time entries, prompt review and approval of prebills (draft bills) should be a job requirement with published turnaround times and performance should be measured—and billing attorneys held accountable.
- Attorneys should review bills only once, get it right the first time.
- Don’t send custom cover letters, send a status letter under separate cover.
- Implement procedures that provide for exact attorney and administrative review of initial bills to assure accuracy. Your initial bill will set the client’s expectations. Initial errors, incomplete information, deviations from the engagement rules will create an expectation that the firm’s bills require review, rejection, correction and rebilling each and every time prior to payment.
- Manage your file in real time to avoid payment delays—for example, use software that will notify when a client is close to their budget and that automatically audits time and expense entries against engagement rules.
- Attorneys should call clients and let them know what to expect if the bill is going to be higher than expected.
- Invest in software that facilitates management and editing of prebills.
o Accounting has to take the initiative to track outstanding prebills and retrieve unreturned prebills.
o Editing bills should be almost as easy as editing a document and software should handle the accounting and retain original information, changes and the final bill data.
- Use window envelopes when mailing bills
- Don’t waste a day by letting bills remain in your mailroom, unmailed overnight. Establish procedures to deliver the bills to the post office if needed.
- Be proactive when it comes to collection procedures—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. 80% of your excess investment in A/R is from clients paying a little late versus real collection problems.
- 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.
- The time to work accounts receivable is before accounts becomes a problem, not afterwards. And the preferred way is to work them as low as possible in the organization. Use honey instead of vinegar.
o Assign someone in your administrative staff who smiles over the phone to be that nice person from the law firm.
o If you are billing individuals, have him or her call and confirm that the client received the bill. Ask if they have any questions. Remind them of the due date. If payment isn’t received within days of the payment date, call back and let them know you haven’t received the check. Ask if they mailed it. If they haven’t, ask if they will place it in the mail that day or bring it by the firm's office.
o If it is a business, try to get agreement to mail the bill directly to Accounts Payable with a copy to your case contact. Let the client know that paying the bill on time will not waive the client's right to raise questions or dispute charges once he or she has reviewed their copy of the bill. If you have to send the bill to your case contact, find out the name, phone number and e-mail address of their secretary (or assistant). Have the person in charge of dispensing honey call the secretary after the bill is mailed and ask the secretary to be sure the bill makes it to the top of the contact’s to-do stack. Let the secretary know you will call back in a few days to check on the status of payment.
- What happens when the honey doesn’t produce payment? That’s when your business software needs to be smart enough to automatically notify the appropriate person in the firm that their intervention is required.
Alternative Billing can make billing faster and collection time shorter. Negotiated fixed fees with advance payment and/or progress payments should be promoted by the firm. For partial work, negotiate a monthly or quarterly fixed fee billed in advance of the period. Fixed fee arrangements not only speed up collection for work performed but lets the law firm benefit from its internal efficiencies arising from technology, knowledge management and cost of labor advantages achieved through supervised leveraging.
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Filed under Cash Flow Issues, Policies/ Procedures by Tom Collins