Perfecting Law Firm Billing and Collections for Financial Success
Law Firm Finances
12 min read
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While performing work as an attorney is critical, it’s safe to say that it’s what comes after the work that keeps your firm afloat. You must both bill your clients for the work you performed and collect the money. (Yes! We see way too many firms struggle in this area). The cash you bring into your business is absolutely necessary to sustain and grow your business. The fact is that you can’t do much without it.
Law firm billing is often a sore subject for many attorneys. We’ve all had those clients who simply cannot or refuse to pay on time. We’ve all scrambled, trying to send out invoices and receive payment before we need to pay next month’s bills.
It doesn’t have to be this way. Over the years, we’ve found the processes and tools that have helped us perfect our law firm billing and collections. Now it’s time for you to do the same.
From paying your bills to purchasing updated equipment for your office and making payroll, you need money. A solid law firm billing process can ensure you have the cash flow necessary to meet your firm’s demands.
Your billing process starts once you perform the required work (or after you’ve been engaged, depending on your fee structure). We talk a lot about the importance of being a client-centered law firm around here. This means that the processes for how you invoice clients and collect money should work for your clients and your firm.
Your invoice is one of the many ways you communicate the value of your services to your clients. Your invoices should be clear and concise, meaning your clients should be able to easily read them. After all, they’re more likely to pay when they know what they’re being billed for.
Make sure your invoice template includes a few key elements:
It’s also important to organize and store your invoices in a way that makes future retrieval easy. Many electronic billing programs will do this for you. Otherwise, make sure you have electronic copies saved in your electronic filing system.
Remember to treat each invoice like any other client communication—clear, organized, and efficient.
Oh, and: it’s time to ditch the billable hour. It’s worth saying again: ditch the billable hour.
Billing by the hour isn’t valuable. In fact, you often lose money by billing in this way. You don’t capture the true value of your work.
You see, your clients don’t want to buy your time. They want to buy a solution to their problem. An invoice with a list of tasks tied together with time increments won’t help them see that solution.
Additionally, when you’re focused on billing by the hour, you’re focused on the time you spend doing a task. Stop it. Instead, focus on the value you can provide to your client.
Luckily, there are several ways to bill for your work that allow you to focus on what matters most and that help your client better see the value of your services.
You can check out our thoughts on pricing models to learn all the options, but here are a few to consider:
Subscriptions: Some attorneys choose to use subscription-based models for clients they retain on a monthly or yearly basis. For example, you might charge a subscription fee for acting as outside counsel for a small business.
Flat fee: Using this method, you charge a flat fee for each service you provide. The days of watching the clock to track by the minute are over!
You could pick one of the above, a combination, or something else altogether. Find something that makes sense for your clients and that works for your firm.
Here’s an example: meet Bill. When he first joined our coaching program, Lab, he admitted that some of his clients hadn’t received a bill for six months or more. Bill was busy practicing law and dealing with client emergencies each day and never stopped to record his time. Common story, right?
He told himself he’d take a few minutes at the end of each day and put it all into the system before going home. When the end of the day came, he was tired and running late to be with his family, so he told himself he’d just do it in the morning. You see where this is going.
Of course, the morning brought another client emergency, and the delay continued. Because he wasn’t routinely invoicing his clients, cash wasn’t coming in. His system was broken and his firm was suffering.
Unfortunately, Bill is not alone. We often meet attorneys who bill by the hour, but who don’t track their time as they work. Instead, they attempt to go back through phone logs, emails, and filings, attempting to recreate their time and prepare invoices.
This often leads to significant under billing and loss of potential income to the firm. It’s an enormous waste of time and resources spent recreating time entries for the invoices instead of just capturing the time and tasks as the work is being done.
If you’re going to bill by the hour, create a system to ensure everyone in your firm captures their time while the work is being done and with as little effort as possible.
Today’s software gives you so many helpful options to help timekeepers get this right, including timers, voice dictation, and even AI tools that record your keystrokes and determine where you spent your efforts. Your firm has to get this right on the front end or risk losing significant money on the back end.
Because Juan was behind on capturing his time, he also wasn’t getting his invoices out promptly. This negatively impacts the firm in so many ways.
First, there’s a direct correlation between the time you send invoices and clients pay them. The more time between the work and sending the invoices, the less likely you will collect the funds. To avoid situations like this, send invoices promptly.
Even if you do eventually get paid for the invoice, you’re losing the ability to use that money for the intervening 6-7 months. You still have your regular expenses (rent, utilities, payroll), but your firm doesn’t have the benefit of using the cash from the work you did to finance those expenses.
Think of it this way: you’ve done the work your client agreed to pay you to do. The money you earned is sitting in their bank account instead of yours.
Failure to send invoices leads to more issues than you may realize. Beyond simply not receiving payment, your clients will stop trusting you and your ability to perform. Why? Because sending an invoice six months late speaks volumes to your clients about your organization, responsibility, and client service.
So, when should you send invoices? We recommend sending your invoices on a regular, predetermined schedule—at least monthly.
The year was 2019, yet Rob still created invoices the old-fashioned way. Every day, he’d send his assistant an email with all of his time and tasks for the day. The assistant would convert the email into an Excel spreadsheet and use that to create an invoice manually.
Whew. The time ?to complete this complex process (sometimes days!) was time you could have spent on more important tasks.
You can quickly resolve that wasted time by implementing legal billing software. After all, the software provides the accuracy in your records and works as a “set it and forget it” solution for your billing processes. There is also a wide range of billing software tools you can choose from.
For example, some legal time and billing software can track time, create invoices, and reconcile accounts without you needing to lift a finger. There’s also software for expense tracking, providing estimates, accepting online payments, and setting recurring payments.
Some of our favorites include:
We recommend considering what tools you need based on your billing methods and finding a time and billing software solution made specifically for lawyers that fits those requirements.
Although solid billing practices can help decrease collections, the need for collections won’t disappear completely. It’s important to have a collections process ?that eliminates frustration for both you and the client.
Invoices typically go to collections after a certain amount of time passes without payment. It’s typical for any organization to wait at least a month or so before they begin the collections process.
As a solo attorney or the owner of a small firm, you’re often responsible for handling collections on your own.
A lot of attorneys we talk to feel that if they’re honest about how much the entire representation will cost, they’ll turn clients away.
This isn’t true. In fact, being upfront about what you charge and what they are signing up for will help your clients understand whether they can afford your services. It could lead to a helpful conversation where the attorney and client determine the path forward based on what the client actually needs and can reasonably afford.
Instead, attorneys often tell clients it will be $X.xx per hour. Clients do not know what that really means, and then everyone becomes frustrated in a few months when invoices are mounting and the clients can’t pay.
Instead, we recommend attorneys speak to their clients about what services they’ll require and their cost before you start work.
Also, discuss the potential for snags, hiccups, and surprises that often crop up in legal situations. The key is to be as transparent as possible, so they’re as prepared for their bill as possible.
Just like everything else you do in your firm, you need a solid structure and process for your collections. You must set expectations by explaining your processes and sticking to them.
Consider the following questions when you’re creating your process.
When will you consider an invoice aged or ready for collections?
Will you call the client first or send them a letter? Will you use another method of communication?
Who on your team will be responsible for collections? Will it be you or someone else?
If a client disputes an invoice, what process will you have in place for handling disputes?
Will you offer to settle debts for less after a certain period?
Your accounts receivable is a representation of the money owed to your firm by your debtors, a.k.a. your clients. You should monitor your accounts receivable regularly.
If you use a billing or bookkeeping software, you should have access to an accounts receivable report that shows you past due accounts.
If you don’t use software (which you should!), we recommend creating and updating a manual accounts receivable report at least weekly.
As you monitor these numbers, you’ll need to put your billing and collections process into play. Now, there’s no reason ?you have to wait until a bill is a month past due to send little nudges about payment.
For example, you could email a reminder three days after you send the invoice and plan to make a quick phone call after a week. And some firms have started sending text reminders.
A simple billing and collections process might look something like this:
Whatever you choose to do, it’s critical that you follow your plan for every single account. It’s the only way to keep up. Again, billing software can automate each step in your process for you.
If you shuddered at the thought of calling your clients over a past-due bill, you’re not alone. This is one of those tasks that no one enjoys. If you want your firm to stay afloat, though, it’s required.
First things first, make sure you review the client’s financial file to gather the amount owed, any late fees or penalties, the date of the last payment, and any other relevant information. With that information in hand, call your client and ask if now is a bad time to talk. If it is, ask to schedule a call at a different time.
We recommend starting with gratitude, thanking them for being your client. We also suggest asking if they’re satisfied with your services. If they’re not, it may help you understand the delay in payment.
Then explain their past due amount and ask the client to work with you to find a solution. Offer the ability to make a partial payment and set up a plan for the remaining balance. It’s best to remind them that you can’t continue to represent them until they pay their balance or start a payment plan.
Finally, remember to document each call you have with each client.
We know you’re working hard at being an effective attorney while running an efficient business at the same time. Everything, including billing and collections, seems to fall on your shoulders.
Take a moment to breathe; you don’t have to figure out all of this in one day and you don’t have to figure it out alone.
Start with a simple billing process and make changes over time. Look into investing in legal time and billing software to take the burden of billing and collections off your shoulders. Whatever you do, make time to prioritize doing what it takes to ensure your hard work does indeed pay.