When it comes to money, a law firm is like any other business. Without funds it will quickly start suffocating and very soon it might end up having to sell the office chairs to pay the rent. According to a recent poll, however, lawyers hate to ask their clients to pay their accounts. Perhaps that is the reason why the same survey showed that 73% of small legal firms are struggling with overdue accounts. If this sounds like your firm, something needs to be done very urgently. And since accounts receivable is at the heart of most law firm cash flow problems, that is where you need to start.
Virtually Eliminate Law Firm Cash Flow Problems By Asking For Upfront Payment
The retainer system is used by many law firms to ensure that they never need to chase clients for money. This simply means that you discuss the work that needs to be done for a client with him or her, do a cost estimate, and then ask for an upfront payment.
But what happens when the retainer runs out before the work is completed? The secret is not to wait for this to happen. You need to have a proper system that keeps track of retainer balances and as soon as a client’s retainer, for example, drops to 25%, you have to ask them to replenish it. This way you will never have to struggle with collection costs or be forced to write off bad debts.
Law Firm Cash Flow Secret Number Two: Accept Many Different Payment Methods
Let’s face it: the 21st century is all about convenience. Clients are simply no longer going to stand in a queue at your cashier’s desk once a month to pay their accounts. They expect that you will offer them multiple payment options so they can choose the one that’s most convenient for them. Failing to provide an option that suits their needs could simply mean that they either don’t pay you, or that they move on to the next legal firm.
The list nowadays includes not only cash, but also credit cards, debit cards, bank transfers, mobile payments, debit orders, and online payments. And very soon cryptocurrencies might join the list. The more payment methods you offer, the better the chances that you won’t have law firm cash flow problems.
Properly Manage Accounts Receivable
Of course it’s a huge hassle to pursue outstanding amounts. Chasing clients for money also comes with the risk that, even if you improve your law firm cash flow, you might lose their business. If not handled professionally, this can happen quite easily.
That is where a properly managed system comes in. Don’t wait until the client is six months in arrears before contacting him or her about their account. Have a clear system in place where unpaid amounts are within a few days followed up by a friendly email or SMS reminder. Follow this up with a phone call a few days later. And if that still does not work, rather make an appointment with the client to discuss his or her account instead of immediately resorting to legal threats.
Legal billing software can take a lot of effort out of the process and help to improve your law firm cash flow by automating many of these tasks.
Introduce Incentives For Early Payment
Let’s say you normally allow 60 days for invoices to be settled but on average your clients take 90 days before they pay their accounts. One option is to give an incentive for early payment. You can, for example, give a 5% discount if the client settles his or her account within less than 60 days. And if they do so within 30 days or less, give a 7.5% discount – or whatever percentage you can live with.
Introduce Provisional Free Services
This is a novel way to enhance customer goodwill and at the same time improve your law firm cash flow: Keep a record of all those small charges for phone calls, emails, making photocopies, etc. but don’t add them to the main section of your bill. Instead, add a separate section at the bottom where you list all these minor items. And then make them all free of charge, provided the client pays the bill within a certain period, e.g. 30 days.