As a law partner or associate, it’s easy to see accounting as an afterthought, especially if you have an in-house person or department that handles billing. In reality, achieving and maintaining a successful accounting system should be a firm-wide effort. Why? When accounts receivable runs like a well-oiled machine, money tends to arrive faster, with fewer dollars falling through the cracks. The larger the law firm, the more reliance there needs to be on everyone to do their part to keep a well-oiled machine.
Findings from Citi Private Bank Law Firm Group and Hildebrandt Consulting’s 2019 Citi Hildebrandt Client Advisory, which establishes the current landscape for the law firm industry, is a good reason for law firms to focus more energy on improving and maintaining a healthy collections system. The advisory report noted that while many law firms were reaping the rewards of appropriate sizing and reporting strong levels of activity in 2018, firms’ collection cycle lengthened by 0.8 percent. The result was a build-up in inventory: 6.6 percent in accounts receivables and 7.8 percent in unbilled time. So, even if a law firm is enjoying growth and good case volume, lack of organization can affect how much a firm gets paid and when.
There are three critical principles, or “attitudes,” an entire law firm should have about their accounting practices: promptness, transparency, and correctness. These attitudes must start during an attorney’s initial consultation with a prospective client and continue through receipt of the final payment, and every member of the firm should be on the same page.
Martindale-Avvo’s 2019 Attorney Compensation Report revealed that more than three-quarters of attorneys surveyed use an hourly rate structure to bill clients. The practice is more common among attorneys representing businesses rather than those representing consumers. Among attorneys using alternative methods, 57 percent of solo practitioners and 39 percent of employed attorneys use fixed fee billing. Further, the report found that most attorneys spend at least 20 hours each week on billable work involving legal research, document filing, administrative/managerial work, and other tasks besides meeting with clients and representing them in court.
Since attorneys’ billable work is the bread and butter of a law firm, it’s obvious that the sooner a bill goes out, the sooner it can come back paid. However, that’s not the only task that a firm must take on with prompt attention. Reporting on bills is also critical to evaluate any delays that those handling accounting tasks must remedy immediately by following up with clients and referring attorneys whose payments are outstanding beyond their reasonable due date.
A law firm’s attorneys, staff, and their clients should all be perfectly clear on the billing process and how the firm calculates bills. Besides the fact that it’s best practice to follow the guidelines set American Bar Association’s Formal Opinion 93-379 Billing for Professional Fees, Disbursements and Other Expenses, providing clarity with regard to billing is simply a good faith effort between the attorney and client, which also reduces wasted time on further explanation.
In addition to fees and expenses imparted on the client, a firm’s invoice should clearly identify its billing rate and calculation method. It’s also useful to offer a clear description of the firm’s compensation (such as contingency, flat-fee, etc.) and a breakdown of the billable work being invoiced in the billing statement. While these items are all most likely already on an attorney-client fee agreement, repetition is not a bad thing. Offering this information on all billing-related documents can avoid payment delays and unnecessary phone calls for clarification.
Of course, correct fee agreements are crucial to getting paid the right amount for all billable work. However, billing for too few hours can easily happen as a result of human error. This is where calculators and management software are extremely helpful tools in a law firm’s toolbox. There is no reason to rely on memory or written notes when software can literally act as a stopwatch, calculator, and log to ensure no hours go through the cracks.
It may be relatively easy for an in-house accounting professional to keep up with billing demands and stay organized. However, as a law firm transitions from a single practitioner to a medium- or large-sized law firm, there is an even stronger need to rely on tried-and-true processes. It’s the simplest way to yield predictable, measurable results from each part of the sales cycle, client management cycle, and employee management system.