Financial security, the peace of mind that comes with knowing your finances and long-term planning and processes are in order, is priceless. While many people devote countless hours and other resources to establishing their personal financial security, as a business owner, it’s equally important to ensure your law firm’s financial security. Specifically, it’s important to understand how your daily activities in billing, business accounting, and even trust accounting can significantly influence a firm’s financial standing.
In this post, we’ll be briefly discussing how to increase your law firm’s financial security by offering ten tips to help you create solid systems pertaining to billing, collecting, and recording income, plus eliminate poor practices that can negatively affect your bottom line. For a full explanation of each tip, be sure to watch our on-demand webinar Law Firm Financial Security: 10 Tips to Keep You Solvent, Safe, and Successful.
Tip #1: Capture ALL Time & Costs
The best way to get paid for everything you do is to record time and costs in real-time. It simply isn’t enough to rely on your memory or loose notes and emails; what is not tracked will not be billed, and what is not billed will not be paid—both in terms of time and expenses.
Tip #2: Timely Billing
It’s easy for law firms to fall behind on billing, and catching up on late time-keeping entries can prolong the process even more. Additionally, systems are often tedious, and firms that are still billing manually not only waste time, but also open themselves up to error.
Tip #3: Utilize Collection Reminders
No one likes to deal with collections. However, it is a necessary part of running a service business, and it is essential to your firm’s financial security. By staying on top of overdue bills, you increase the likelihood that they will be paid and promote higher cash flow for your firm.
- Allow your billing system to act as a free collection agent by ensuring it can generate periodic collection notices in batch and send them via email.
- Don’t forget about retainers. An “empty” retainer account can have the same impact on your bottom line as an unpaid bill. Since you can’t expect clients to remember to send a replenishment check, set up a retainer alert system to send periodic reminders.
Tip #4: Know When to Pay Vendor Bills
Law firms must pay a variety of bills at any given time, so you must pay attention to when each one is due.
- While it may seem counterintuitive, you shouldn’t pay for everything at once (unless you have to), as this will help to ensure you have the required cash flow when needed. This is especially true for client reimbursed costs. For some expenses, it is advantageous to seek reimbursement prior to the bill being due, so your firm is not out of pocket.
- Utilize a system that manages the hold and release of payments to track invoices, due dates, and amounts. Maintaining a steady balance that ensures your earnings can cover your costs is one step toward establishing your firm’s financial security.
Tip #5: Implement a Productivity Based Compensation/Bonus Plan
One way to increase your firm’s income is to implement a compensation or bonus plan based on productivity. Since there are often a variety of parties involved in a case, it’s helpful to:
- Track by originating attorney, responsible attorney, and/or timekeepers.
- Focus on income earned and not time billed, which also requires integrated accounting and billing systems.
Tip #6: Track Income by Practice Area
It is best practice to segregate fee income by practice area as this:
- Enables quick analysis of profitability
- Allows you to evaluate growth opportunities
- Highlights prospective marketing opportunities
Tip #7: Ensure Matter’s Obligations Does Not Become Your Headache
In practice areas like Personal Injury, Workers Compensation, and Family Law Mediation, it is necessary to track bills incurred by clients (doctors, hospitals, other attorneys, etc.). However, it’s important to remember:
- While these are not firm expenses but rather your client’s bills, you must properly track any bills incurred by clients.
- Don’t let the burden fall on you! Track these items closely, and be sure to keep your client informed so that expectations are clear. Once court approval is received, you must first disburse funds to third parties and to your firm prior to the client.
Tip #8: Enforce Regular Reconciliation of ALL Accounts
Reconciliation is not just for trust accounts; it should also include credit cards to ensure all transactions are captured as well as business accounts. The purpose of reconciliation is to:
- Catch mistakes as soon as they occur
- Ensure all matter costs are captured
- Review monthly reports to guarantee accurate information
Tip #9: Prevent Financial Fraud
Financial fraud can happen to anyone. While the best method is prevention, you should also have a tight recovery system in place should a case of financial fraud occur.
- Daily reconciliation, if possible, is critical in discovering an issue once it has taken place.
- Keep bank statements confidential and secure.
Tip #10: Utilize Granular Permission Controls
Regardless of the size of your firm, it is essential that only the appropriate members have access to certain information. In order to establish such safeguards, it is key that you:
- Understand the roles each user plays
- Operate on a need-to-know basis
- Ensure that the tools you utilize allow for permission and restrictions of certain areas
Financial security not only offers peace of mind, but it is also a fundamental component of running a successful law firm. For more information, be sure to tune into our webinar, Top 10 Tips to Increase Your Financial Security.