Running a law firm, large or small, is not easy. Many firms report that their biggest challenges involve slow payment times and uncollected money sitting in their accounts receivable (AR). Typically, the most severe pain points are the length of time it takes for firms to get paid and low realization rates for overdue bills, both of which greatly influence cash flow (or lack thereof).
Firm collection processes are varied, but most firms handle collections inefficiently and without a uniform or consistent internal process. Once a bill is sent to a client, the law firm generally waits 60 to 90 days for the payment to be remitted. If a bill goes unpaid for 120+ days, a firm may decide to offer a discount to the client to incentivize at least partial payment on the bill (otherwise known as a write-down). Should the bill continue to go unpaid and become “stale accounts receivable,” the firm may eventually write it off. In the end, the firm sees, on average, only $.86 per dollar billed.
All this isn’t to say that law firms should just give up on unpaid bills—they should, and often do, try to negotiate with the client. But it’s more typical for firms to provide a discount proactively rather than waiting for the client to ask for a discount as a way to incentivize partial payment. Unfortunately, this sets a precedent with clients and institutionalizes poor payment habits. Regardless if you’re a solo attorney or partner at a midsize firm: consistent cash flow can make or break your business.
Fortunately, there are alternative tactics beyond the discount that a firm can take—not only to get paid faster but get paid in full! Below are seven strategies to consider introducing into your billing process.
1. Enable Online Payments
Traditional paper checks are still the leading form of payment in the legal industry, but the data shows that making it easy to pay electronically ensures you get the cash in hand much quicker. eCheck payments, for instance, take only one to three days to clear compared to the typical five business days for a paper check to clear once it’s deposited into a firm’s bank account. Credit card payments are even faster, and while that does come at a price (either fixed or fluctuating transaction fees depending on your processor), it’s a small cost compared to the value of getting cash in hand sooner.The aim is to give clients the flexibility to choose what’s best for them. Modernizing through electronic payments is likely to delight them, and ultimately lead to more business for your firm. In fact, 66% of consumers report that electronic billing increases their satisfaction with billers, and another 36% say it makes them less likely to switch to a competitor.
2. Add Interest Fees on Late Payments
Net 30 is standard for most small businesses, yet the status quo in the legal industry is 94 calendar days or more. Likewise, the norm in most service industries (credit cards, cell phones, etc.) is to add a late fee or interest charge for late payers. Legal service providers, however, rarely impose a deterrent for past due invoices. While it may not be the custom yet, the ABA has given the green light as long as the client has agreed to it in advance. Getting the extra amount on the invoice isn’t the point, rather, it’s a way of encouraging clients to pay on time. Think about why you likely pay your credit card bill on time each month. It’s not because you particularly look forward to doing so, it’s to avoid the interest payments you’ll be charged if you don’t. Implementing interest fees as a way of incentivizing timely payments will improve the cash flow of your business—and ultimately—reduce the stress and emotional burden that result from overdue invoices.
3. Ask for an Upfront Deposit
The debate between hourly billing versus alternative fee structures won’t be over anytime soon. But the fact is that clients are becoming savvier and more cost-conscious, and that increases the likelihood of pushback and payment delays. The upside to a fixed-fee structure is that total fees are paid upfront, removing any risk of discounting services or, even worse, a write-off. One the other hand, it can be hard to gauge the exact amount of work a fixed-fee project will require, and if unexpected issues arise profit margins could narrow, or you could suffer a loss.A better approach is to request a partial payment (50% deposit) in advance with the balance due upon completion. An upfront deposit reduces the risk of nonpayment and increases the chances for a 100% realization rate.
4. Make it Easy for Clients to Schedule Payments
The best way to incentivize quick payment is to make it convenient. Scheduled payments allow a client to set up online transactions in advance of the due dates or on a recurring basis by using a credit card or bank account. They have the flexibility to make a one-time transaction for the big bills or enroll in automatic recurring billing to effortlessly manage monthly retainers and invoices.When transactions run automatically, firms spend less time chasing after unpaid invoices and more time serving clients and working billable hours. It also gives your client one less thing to worry about, which is probably why they came to you for legal services in the first place.
5. Offer an Installment Payment Plan
Let’s face it: depending on your practice area or client base, you may have clients that have the best intentions to pay on time but simply aren’t able to do so. Giving clients the option to pay in installments over time until the bill is paid in full doesn’t get you paid quicker, but it does guarantee full remittance. It also shows your client that you care and value your relationship with them enough to offer flexibility. Similar to the partial upfront payment, ongoing installments establishes a steady cash flow that you know will be coming in over a determined period of time.
6. Automate Collection Efforts via Email
This tip can be an absolute game-changer for firms that dislike the collection process. Many firms find the collection process so onerous that they avoid it altogether. Luckily, there is a better way to collect on overdue invoices than the traditional awkward phone call. Setting up an automated firm-wide collection process via email reminders is a great way to ensure a missed payment doesn’t fall through the cracks and can act as a firm’s AR safety net. Most platforms even allow you to customize messages and control how often it’s sent, who it comes from, and when the reminders stop.Think of it as another way to offer a personalized experience to your client without making them feel uncomfortable or needing to remember to do so. Having this type of friendly and professional reminders sent on a regular cadence until payment is completed frees up firm time normally spent tracking and managing collection efforts and ensures you stay top of mind until an invoice is paid in full.
7. Track Client Satisfaction via NPS
Once you succeed at getting an invoice paid, the engagement shouldn’t stop there. Ask yourself, how satisfied (or not) is the client with the services your firm provided? And, how likely are they to come back to your firm the next time they’re in need? NPS or Net Promoter Score is a way to easily track client satisfaction over time and should be measured at the time of payment. Think of the experiences you have with the review economy as a consumer: you post a restaurant review to Yelp right after you’ve had a meal, or rate your Lyft driver as soon as the ride is over. Now think about your clients — don’t you want their honest assessment of your services?Tracking satisfaction at the time of payment shows your client you care about their opinion and increases the likelihood that they will return to your firm or refer you to a colleague.
Law firms and solo practitioners must embrace a streamlined client experience that encourages on-time payments. They would do well to consider the standards that other industries have adopted. The retail industry, for example, has gone to great lengths to create a frictionless payment experience for consumers, demonstrating decisively that when you make it easier for the consumer to purchase and easier for the seller to sell, you increase revenue and improve the customer experience. Legal organizations that eliminate payment friction are likely to see similar benefits – in this case, faster payments and better realization rates.