Managing accounts receivable can be a frustrating endeavor for law firms trying to maintain strong cash flow.
By implementing a few key strategies around invoicing, collections, and write-offs, legal professionals can dramatically improve their accounts receivable management.
In this article, we'll explore 7 tips covering payment policies, automation, careful tracking, leveraging technology, strategic write-offs, process improvements, and more to help law firms enhance cash flow through better accounts receivable management.
Introduction
Managing accounts receivable efficiently is crucial for law firms to maintain healthy cash flow. With timely client payments, firms can meet their financial obligations and invest in growth. This article will provide tips on:
Establish Clear Billing Policies
- Create detailed billing policies and fee agreements for each client upfront. Clearly outline payment terms, late fees, and collection processes. This sets expectations.
- Bill clients regularly, such as monthly or after completing defined milestones. Consistency improves timely payments.
- Ensure billing accuracy and include all work completed to avoid future disputes. Leverage time tracking software.
Automate Invoicing and Payments
- Use legal billing software to quickly generate invoices from completed work logs. This also tracks accounts receivable.
- Enable online payments through payment links on invoices. This facilitates faster payments.
- Set up automated payment reminders for overdue invoices. A collections process should also be established.
With clear billing policies and automated systems, law firms can significantly improve accounts receivable management. This allows firms to sustain consistent cash flow for daily operations and future growth objectives.
What are the 7 tips to improve your accounts receivable collection?
Improving accounts receivable collection can be challenging for law firms, but is critical for maintaining healthy cash flow. Here are 7 practical tips law firms can implement:
Automate Invoicing and Payment Reminders
Automating invoice and payment reminder sends through software ensures consistency and timeliness. Set calendar alerts for when payments are due.
Offer Early Payment Discounts
Provide incentives for clients to pay invoices early, such as 5% off if paid within 15 days. This improves cash flow.
Review Billing Terms
Ensure your billing terms align with client needs. Consider allowing installment plans for large invoices. Review terms annually.
Build Client Relationships
Clients more likely to pay firms they have good relationship with. Make payment experience smooth, and communicate about issues.
Analyze Aging Reports
Regularly review aging reports to catch late payments quickly. Follow up with clients on past-due invoices right away.
Consider Accepting Credit Cards
Accepting credit card payments makes it easier for clients to pay bills. Absorb merchant fees or pass to clients.
Outsource Collections
Using professional collection services increases chance of recovering payments. They have processes to secure assets/liens.
Improving accounts receivable collection takes effort, but following these practical tips can significantly enhance cash flow for law firms over time. Consider if services like Legal Buddies can help systemize processes.
How can I be a good accounts receivable manager?
Here are some best practices for law firms to improve accounts receivable management:
Use Electronic Billing & Online Payments
- Send bills and accept payments electronically to speed up the process. This makes billing and collecting easier for both you and the client.
- Services like Bill.com can automate billing and simplify accounts receivable.
Set Clear Billing Procedures
- Establish standard billing schedules (e.g. monthly) and payment terms (e.g. Net 30 days) upfront. Communicate these clearly to clients.
- Send bill reminders before due dates to prevent late payments.
Make Payments Easy for Clients
- Accept multiple online payment options - cards, eChecks, PayPal, etc. This facilitates easy and quick payments.
- Allow clients to store payment information for future use. This encourages repeat digital payments.
- Offer autopay options to have payments processed automatically on due dates.
Use Accounts Receivable Aging Reports
- Regularly review accounts receivable aging reports to stay on top of outstanding invoices and prevent delinquencies.
- Follow up with clients proactively when invoices remain unpaid past due dates.
How do you manage accounts receivable effectively?
Effective accounts receivable management is crucial for law firms to maintain healthy cash flow. Here are some best practices:
Set Clear Payment Policies
Be upfront about your payment terms and deadlines. Communicate these policies clearly to clients during onboarding. Consider requiring retainers and progress payments.
Make Paying Easier
Offer multiple payment options - checks, ACH, credit cards, online payments. Automate reminders for upcoming and late invoices.
Measure Performance
Track metrics like Days Sales Outstanding (DSO), payment patterns, collections rates. Set goals and monitor progress.
Follow Up on Late Payments
Politely follow up on any unpaid invoices after just a few days. Be persistent yet professional with further reminders.
Offer Incentives
Consider small incentives for early or on-time payments, such as discounts or loyalty rewards. This encourages prompt payments.
Work With Legal Buddies
Legal Buddies provides high-quality and cost-effective virtual legal assistants. They can help law firms improve accounts receivable processes for better cash flow.
With clear policies, easy payment options, incentives, and talent like Legal Buddies, you can enhance accounts receivable management. This allows you to focus on legal work rather than constantly chasing payments.
Do law firms have accounts receivable?
Law firms commonly maintain accounts receivable to track outstanding payments from clients. Slow or late payments can negatively impact a firm's cash flow. Here are some tips on effectively managing A/R:
- Set clear payment terms upfront in your engagement letters. Define when invoices are due and what happens if they go unpaid, such as accruing interest or penalties.
- Invoice clients promptly when work is completed. Don't allow invoices to pile up. Send friendly payment reminders as needed.
- Carefully track aging receivables with your accounting system. Identify slow-paying clients.
- Build rapport with clients and discuss options if they fall behind on payments. Offer reasonable payment plans if needed.
- As a last resort, pursue collections or legal action for severely delinquent accounts. Though undesirable, this may be necessary in some cases.
Proactively managing accounts receivable is crucial for law firms seeking to maintain positive cash flow. Setting clear expectations, invoicing promptly, and collections efforts can help minimize unpaid bills. Consider outsourcing A/R management to reduce administrative burden.
sbb-itb-e93bf99
Carefully Track Accounts Receivable
Keeping close tabs on accounts receivable is crucial for law firms to maintain healthy cash flow. With prompt follow-up on outstanding invoices, firms can reduce receipt times and improve operational efficiency.
Send Payment Reminders
- Create standard processes for sending payment reminder notices at set intervals (e.g. 30, 60, 90 days) after an invoice due date
- Automate reminder notices to reduce administrative tasks
- Reminders should be polite yet firm in requesting payment per fee agreement terms
- Note accrued interest on overdue amounts where applicable
Offer Payment Plans
- Payment plans may be suitable for clients facing financial difficulties
- Consider client's situation and ability to pay when structuring installments
- Get payment plan terms in writing clearly specifying payment dates and amounts
- Interest may still accrue on unpaid balances; define terms upfront
- Pre-approve payment plans; don't repetitively offer plans to delinquent clients
Closely monitoring accounts receivable and having standardized follow-up processes helps law firms improve cash flow. Legal Buddies provides specialized support at competitive rates to assist with key functions like accounts receivable management.
Leverage Technology for Collections
As a law firm, having effective accounts receivable management processes in place is crucial for maintaining healthy cash flow. However, keeping track of invoices and collecting payments in a timely manner can be challenging without the right tools. Leveraging software can help automate parts of your collections process to enhance efficiency.
Payment Tracking Software
Automating payment reminders through software ensures you never miss following up on a late payment. Options like Freshbooks allow setting up rules to automatically email invoices and reminders based on custom aging periods.
The software tracks all outstanding invoices and can provide real-time insight into aging buckets. This helps identify severely delinquent accounts needing immediate attention. Dashboards give visibility into collections metrics to analyze performance.
Some key features payment tracking software provides include:
- Custom automated invoice and reminder emails
- Aging reports categorizing outstanding invoices
- Charts showing collections rates over time
- Ability to tag and filter customers
Collections Workflow Software
When invoices become severely late, having a standardized process for collections follow-up is essential. Collections workflow software centralizes all late accounts and structures follow-up activities to recover owed funds.
Tools like Stampli allow creating a sequence of automated actions based on aging milestones. This includes email and letter templates to send at set intervals. Software logs all communications history and pending next steps so collectors know what is owed.
Key aspects collections workflow software enables:
- Centralized list of late accounts with sorting/filtering
- Automated letter generation for different aging buckets
- Task assignment for making manual collection calls
- Reporting to analyze collector performance
The right collections technology reduces the manual workload for your firm by systematizing processes. This results in recovering more owed dollars and faster receivables turnover. Evaluating options that align with your budget and needs is key to see improvements. Legal Buddies can also provide dedicated AR specialists to manage this function as part of your extended team.
Strategically Write Off Uncollectables
Writing off uncollectable accounts receivable can be an effective strategy for law firms to clean up their books while preserving client relationships. Here are some best practices around determining when and how to write off invoices that are very unlikely to get paid.
Criteria for Write-Offs
- Invoices that are 120+ days past due with no client communication or payment plan in place are typically good candidates for write-offs.
- Matters that have been closed for a significant period without payment should also be considered.
- If the client has gone bankrupt or out of business, write-offs should be initiated after following appropriate legal protocols.
- Smaller invoice balances that would cost more to pursue than their actual value may also warrant write-offs.
Process for Write-Off Approvals
- For smaller receivable balances under $1,000, paralegals and office managers often have discretion to initiate write-offs.
- Larger invoices generally require attorney or finance committee approval, depending on firm policies.
- Firms should have standard procedures documented so staff understand the expected process for submitting and approving write-off requests at different thresholds.
Strategically writing off uncollectables that meet firm criteria can provide tax benefits while cleaning up a firm's accounts receivable. Define policies so staff know how to handle these tricky situations.
Continuously Refine Processes
Underscoring the importance of continually monitoring results and fine-tuning accounts receivable processes is key to maximizing collections for law firms. As legal professionals, streamlining the accounts receivable process enhances cash flow while providing quality service to clients.
Key Performance Indicators
To measure the effectiveness of accounts receivable management, law firms should track metrics like:
- Days Sales Outstanding (DSO) - The average number of days it takes to collect payment from clients after services are rendered. A lower DSO indicates high efficiency in collections.
- Percentage of invoices paid on time - The proportion of total invoices which are paid by the due date. A higher percentage is better.
- Accounts receivable turnover rate - How quickly accounts receivable are converted into cash over time. A higher turnover rate means faster payments.
- Bad debt percentage - The proportion of accounts receivable written off as uncollectible. Minimizing bad debts improves cash flow.
Regularly monitoring these KPIs identifies areas for improvement.
Areas for Improvement
Common areas law firms can work on include:
- Client payment terms - Set clear terms upfront and follow up systematically before due dates. Offer incentives for early payments.
- Billing frequency - Bill clients more frequently instead of monthly. This increases urgency to pay.
- Payment automation - Accept credit cards, ACH payments to ease and expedite client payments.
- Account assignments - Assign accounts to collectors and assess performance through KPIs like DSO.
By continually refining accounts receivable processes, law firms can expect noticeable gains in timely payments and cash availability. Monitoring metrics also helps sustain process improvements over the long term.
Conclusion
Here are a few key takeaways to enhance accounts receivable management for law firms in order to improve cash flow:
- Set clear billing terms and communicate them to clients upfront. Establish timely payments and late fees to ensure timely collections.
- Monitor accounts receivable and follow up promptly on overdue invoices. Consider automating reminders with a legal billing software integrated with accounts receivable reporting. This can help prevent client payments from falling through the cracks.
- Review billing and payment policies to identify inefficiencies. Streamline invoicing and accounts receivable workflows to ensure timely and accurate payments.
- Take advantage of early payment incentives. Offer small discounts for advance or early invoice payments to accelerate cash flow.
- Seek outside help to assist with billings and collection efforts. Consider outsourcing with Legal Buddies or accessing useful legal billing software to improve efficiency.
Following these accounts receivable best practices can help law firms enhance cash flow while also maintaining positive client relationships through timely, accurate billing and transparent communications.
