Improve Communications to Improve Cash Flow
According to a Barlow Research Associates survey of small businesses, 31% of law firms said they go to their accountant or bookkeeper for cash flow advice, 19% turn to a colleague, and 18% to their banker. An astonishing 53% do not seek advice at all. While the majority of firms are turning to specialists for help, more than half admit to not seeking any counsel. It is an unfortunate reality that at some point, your law firm will face a cash flow problem. Acknowledging and addressing the blind spots in your financial processes will minimize the damage caused by cash flow issues. To stay on top of their game, attorneys must guarantee profitability. Positive cash flow is one way to ensure success, possibly the most critical way. Conversely, cash-flow concerns will quickly thwart a business owner’s plans. In this article, we are going to look at a simple, but an often-overlooked weapon in an attorney’s arsenal - communication.
Finding the right balance in your cash cycle requires you to close the gap between collections and billing. Collection creep tends to happen when your back is turned. As the saying goes, an ounce of prevention is worth a pound of cure. Finance departments can help attorneys stay one step ahead of the billing cycle by communicating outstanding fees at the right time. By setting up a monthly trigger to review unbilled amounts, you have an opportunity to maximize recovery efforts. Partners generally know the best time to ask about unpaid services, and they can do so with the highest sensitivity to the relationship. Ensure communication about client recovery is a mandatory and consistent practice. If your finance department is in a situation where they need to make a call, instead of starting the conversation as a collections call, frame it as a client service call.
This is John Doe from ABC and Associates. I wanted to check in with you to ensure you are satisfied with our team and their work. I also wanted to make sure you received our invoice and ask if you have any questions before payment is due. It has been a pleasure working with you, and we hope we have the opportunity again in the future.
Establishing this kind of repertoire will help you stay in front of any client service issues and anticipate if a payment problem is likely to arise.
If you bill by the hour, another major culprit to your cash flow is a failure to communicate the right terms. When you communicate a consistent billing plan, both to your accounts receivable department and to your clients, the natural result is a more consistent receivables process. Many firms are testing the flat-fee pricing, which tends to improve their cash cycle. By collecting fees upfront, or establishing an intermittent collection schedule, firms can collect at least half of their project dues before the work begins. A word of caution - flat-fee billing works best with formulaic or transactional jobs, or in projects with effective scoping. It is best to avoid this type of structure with settlement work or clients that like to quibble. A good compromise for limited scope work is a flat fee plus hourly rate structure. This arrangement allows you to offer the simplicity of flat fee billing while maintaining the opportunity for clients to pay more for additional services. Choosing the right fee structure, whether it be hourly, flat fee, or a combination of the two; knowing the value you bring to the table, and communicating expectations in your engagement letter will help keep everyone on the same page.
You must be diligent when it comes to making sure your collectible and payables are in harmony. Take a look at your business to see if a lack of communication is impacting your cash flow cycle. If you need assistance getting back on track, the professionals in our office are here to help.