It’s a healthy cash flow that keeps every business afloat. Law firm cashiers and finance managers must prioritise good financial management – not only because accounting rules demand it but also because their business relies upon it.
Here, Deborah Witkiss at Insight Legal Software advises how to manage cash flow problems in your business, assisted by practice management software, drawing inspiration from the NatWest’s ‘Legal Sector Report 2021: A Year Like No Other’.
Why lengthy credit periods are dangerous
At a time when compliance regulations have never been more stringent, and financial stability never more important, proactively managing the flow of cash through your business is paramount.
Failings on this front can be due to something as simple, yet overlooked, as defined credit periods. If standard payment terms specify a long credit period, the arrival of monies is slowed down – unnecessarily and dangerously so. Although there’s much more to best-practice legal accounting than just your invoicing T&Cs, as anyone with an understanding of complex SRA Accounts Rules will know, it’s as good a place as any to start.
Whilst the world is moving on from the pandemic, there are still lockdown learnings to be had, for example there was an important behaviour shift in relation to billing and in the context of cash flow. This is where the NatWest’s report on 40 law firms with median annual fees of £5 million provides useful industry insights.
Recognising that debtor days (the debt collection period) and work in progress (WIP) days (legal activity undertaken but not yet invoiced), NatWest analysed the total lock up days and discovered that law firms managed their cash flow during 2020 better than previous years. The reasons cited for these unexpected improvements include the introduction of universal monthly billing and requesting cash up front, amongst other measures. Such tactics hadn’t been employed previously.
The issues resulting from the lock up of fees are easy to understand at the best of times. Even more so during a worldwide, deadly virus which put an instant halt on the majority of legal cases and severely impacted cash flow.
Echoing NatWest’s concluding sentiment that law firms should adopt these altered financial management habits as natural behaviours, huge credit periods and sizeable WIP days should be placed firmly in the past. This is the beginning of enhanced legal accounting procedures.
There are additional changes that can be made to money management, with the help of case management and legal accounting software, which will make a big difference to cash flow overall, these being…
Controlling costs, managing budgets and invoicing with no surprises
Keeping a handle on your costs is vitally important for two main reasons. First, it’s about efficiencies. Having already established the trouble with carrying an income deficit, to make sure your costs don’t overly spiral, use workflow and automation tools in your software to get as much work done as possible in the least time possible.
To clarify, workflow is a supporting framework for your staff to follow with tasks and timings defined throughout the course of each matter. Automation functionality is anything that doesn’t require manual input such as auto-calculation of financials, auto-population of data, auto-logging of time records, and auto-saving of correspondence and documents. The combination of these software features is the ability to streamline and get the right things done by the right people at the right time.
Second, you may offer fixed or agreed fee pricing – a set cost for a certain matter type. Even if you don’t provide fixed fee services, it’s likely you’ll give new clients an estimation of anticipated overall costs. For certain types of work, this is actually a requirement under the SRA Transparency Rules. If clients delay paying invoices, it’s usually because the end fee was greater than expected. Don’t give them cause not to pay you and generate more money in your pocket. Utilise the same aforementioned workflow and automation toolkit, and your costs will stay on track.
Billing in an accurate, timely manner
Carrying on from the point about meeting clients’ price expectations, rather than only billing at the end of matters, introduce interim billing upon achievement of case milestones instead. It’s beneficial for your clients – who avoid the shock of one large fee and look upon you more favourably – and it’s beneficial for you – as cash is released to you sooner, thereby preventing cash lock up and potential reputational damage.
The time recording, postings, workflow and accounting elements in your software will empower you to log every chargeable unit of time, recover related disbursements, know when notable matter stages have been reached and invoice accordingly with pinpoint precision respectively. As a services business, your expenditure and activity are less visible than, say, a production line. However, despite being ‘out of sight, out of mind’, your time is your money and you should get paid at interludes in exactly the same way as a factory.
Another thing that stops on-time client payments is the billing mechanism itself. If payments are received by cheque, errors can occur, cross referencing can be a logistical nightmare, and lags are inevitable as you need to pay cheques received into your bank and wait for them to clear. If payments are performed over the phone, clients are restricted to office opening times only which fails to cater for busy lawyers who might prefer to tackle their bookkeeping outside of standard business hours. It also demands that you have a merchant terminal to take payments via this method.
For billing excellence, create and send electronic invoices containing embedded payment links. To pay, all your client has to do is click on the hyperlink within their bill. On the subsequent billing screen, the correct amount, case reference and your bank account details will be pre-populated. There’s no barrier to paying or cross checking required and mistakes are minimised.
As well as speeding up credit payments for improved cash flow and strengthening client care standards, you meet your protection of client monies compliance obligations. Plus, you’ll reduce your reliance on paper files which is no bad thing in this hybrid working era with its focus on digitisation.
Reporting as your guiding light
The reports in your software are there to inform your billing processes. Whether it’s analysing current payment periods and checking WIP levels or performing cash flow forecasts, your billing suite is the go-to place for financial insights to operate compliantly, profitably, accurately, efficiently and digitally – your bedrocks.
Your outflow of monies – or purchase ledger – is worth a brief explanation. Reports and system prompts in your software enable you to adhere to outbound payment terms. Why action requests for payments straightaway if you can keep the money in your bank for an extra two to four weeks? Needless to say, retaining money for longer bolsters cash flow too.
Putting your cash flow in safe hands – Insight’s!
If you find your incumbent case management and legal accounting system lacking regarding the specific functionality mentioned in this article, your cash flow (and, therefore, your business) could be at risk. Insight Legal does the above and more. It’s a complete practice management application for all your staff to use – fee earners, paralegals, cashiers, administrators, managers, COLPs and COFAs so you can rest assured that your law firm’s financial management is under control.
On the subject of cash flow, our software is charged monthly on simple 30-day or 12-month rolling contract terms. There are no prohibitive upfront costs and your money’s not locked up in contracts that are hard to get out of.