Does your firm have a strategy for achieving zero accounts receivable?
Most law firms provide services under the expectation of being paid once services are completed and fees have been earned. While this compensation model is common, it creates an environment where law firms routinely maintain high numbers of unpaid invoices. But with the right tools and a few process changes, you can take steps toward collecting every penny billed.
The Effects of High AR (Accounts Receivable) on Law Firms
Accounts Receivable (AR) represents outstanding revenue for legal services that have been invoiced but not paid. Many law firms carry a high AR because their collection processes fail to yield adequate results. According to the 2018 Legal Trends Report, the average law firm only collects about 85% of their invoiced amounts. That may seem acceptable, but that uncollected 15% can easily add up to tens of thousands of dollars in lost revenue.
Outstanding invoices can strain a firm’s cash flow and cause financial difficulties. Most law offices require a substantial amount of overhead to keep the doors open. Without sufficient cash flow, expenditures like payroll and taxes can quickly outpace revenues. Yet, even with the negative consequences of high AR, firm leaders often choose to accept unpaid invoices as a cost of doing business instead of taking steps to improve their collection procedures and lower AR.
Attorneys give two main reasons for choosing this option:
- Time. One reason centers on the amount of time involved in their collection processes. Lawyers argue that their time and resources could be better spent on more profitable tasks. While this thinking seems reasonable, it overlooks the possibility that more efficient and effective collection methods exist.
- Client relationships. The other reason asserts that collection processes strain client relationships. However, with the right procedures in place, law firms can successfully collect fees while maintaining positive client relations.
The Must-Have Strategy for Zero Accounts Receivable: Automated Withdrawals and Batch Billing
Today, automatic withdrawals and batch billing are common business practices. A variety of companies, from lenders to streaming subscription services, use these strategies to ensure payment for all types of transactions, services and products. Yet even with the wide consumer acceptance of these processes, the legal industry has been extremely slow to implement them.
To lower accounts receivable and, ideally, reach zero AR, law firms must embrace automatic withdrawals and batch billing practices. Here are five simple steps for making that happen:
Step 1: Stored Payment Methods
With automatic withdrawal arrangements, clients provide credit card or bank account data to the law firm along with preauthorization for billing. The firm securely stores this information for payment processing when its fees are earned. Stored payment methods provide firms with a greater level of assurance that invoices will be paid on time and in total.
Step 2: Communication of Payment Procedures
Firms must ensure that payment procedures are clearly and completely communicated to clients so that there is no confusion about when and how payments will be processed. These communications may include the initial engagement agreement and a separate payment explanation agreement. Also, firms can send automated payment notifications with each invoice. For example, if payments will be automatically drafted five days after the invoice date, law firms should explain the process and timeline to clients.
Step 3: Charge Under the Agreement
Staying within the payment agreement parameters, law firms can automatically process payments on a predetermined date. The process saves clients the time to manually remit payment and provides firms with an effective tool for timely and complete collections.
Step 4: Bill in Batches
Batch billing takes automatic payments a step further by streamlining the collections process for all clients. With a few clicks of the mouse, the firm can simultaneously secure payment for all client accounts with stored payment methods. Note that batch billing is not a widely available option within the legal technology marketplace. Most billing platforms require firms to process automatic payments one at a time.
Step 5: Choose the Right Legal Billing Platform
When implementing automated payment and batch billing procedures, identify billing software that offers the tools necessary to complete these processes. TimeSolv’s legal billing software includes batch billing capabilities and its patent-pending technology provides users with an innovative tool for pursuing 100%
One Firm’s Journey to Lower Accounts Receivable
Modern Family Law is a domestic law firm with offices in Colorado and California that successfully reached a 97% collection rate. In a recent webinar, shown below, the firm’s CEO, M. David Johnson, explained the firm’s evolution from traditional retainer agreements to more modern billing practices.
At the onset of representation, clients provide a payment method and documented preauthorization. Once invoices are sent, the firm allows three days for review before automatically processing the credit or debit card on file for payment. “I think that this process is something that all firms could really implement,” Johnson said. “You’re not just accepting electronic payments where you hope that the client will come to you with the credit card payment.”
In addition to these autopayment procedures, Modern Family Law also uses TimeSolv’s batch billing features. Johnson said that instead of taking days to process payments, the firm processes numerous client payments in minutes, saving valuable time — and furthering the firm’s pursuit of zero AR.
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