For many law firms, having a stack of overdue invoices is the norm. Studies agree that most firms leave a significant portion of your accounts receivable (or the money owed for work) on the table.
Why do law firms have such a high percentage of accounts receivable (AR)? And what can they do to improve collections? Below, we break down the problem and outline steps toward an actionable solution.
Following up with overdue accounts can be awkward and stressful. No one likes writing polite reminder emails to clients who owe money. And no one likes wondering if a client will leave a bad online review or recommend a friend not hire a law firm because of the firm’s collections activity. Even if the situation rarely pans out that way, the worry can be enough to put off many lawyers from following up on their AR.
Collections also take time. Add in the stress and worry mentioned above, and pretty soon, it’s easy for a lawyer to convince themselves that it’s not worth the hassle.
But that means that you’re leaving about 15% of your money on the table. That can fund a generous marketing budget—and a lot of other things, too.
The legal industry is notorious for being slow to embrace change. But issues around collections make a compelling case for an exception: doing things the way most other businesses do.
In most of the business world, companies store billing information and get preauthorization to charge a credit card for services rendered at regular intervals. From utilities to health insurance to mortgage payments, pre-authorized withdrawals are standard.
Clients are used to paying for services in this way. The issue is that law firms haven’t adjusted.
What to do
Pre-authorized payments can be charged to a credit card or withdrawn from a bank account. Many of your clients will likely want to pay with a credit card, so make sure that you’re equipped with a legal-specific merchant that can handle credit card payments without putting you at risk of an ethics violation.
And like pre-authorized payments with any business, clients need to know what to expect. Make sure you’re upfront about your firm’s policy—and that your clients have signed a preauthorization agreement.
Then, when you send out invoices, leave a few days before charging the account. This courtesy can go a long way toward giving clients a chance to remember about their legal bill—you don’t want clients to feel blindsided.
Once the automated payments have gone through, you’re good to go—and not stuck wondering if collections issues will throw off your budget or payroll.
Modern practice management
If you take the appropriate steps, pre-authorized billing can significantly reduce your need for collection activities.
The technology to store bank or credit card information and make scheduled charges goes hand-in-hand with several other aspects of a modern practice management system that can save you time—such as batch billing and fully integrated billing, payments, and accounting systems.
You don’t need to spend hours each month sending out individual invoices and then doing data entry to update your accounting. Instead, you can generate all your invoices for the month in minutes. Once pre-authorized payments are received a few days later, your billing and accounting systems will automatically update to reflect the new balances.
Haggling over collections—or avoiding following up altogether—wastes time and energy.
Instead, your modern practice management system can help reduce accounts receivable and lead to less time spent on the administrative side of running a law firm.
Get paid for the work you do—not just 85% of it.