money circles

 

Write-offs are all too common at law firms, impacting profitability and,  in the case of smaller firms, the ability to make ends meet. On average, law firms write off as much as 14 percent of their total bills. The reasons for these write-offs are multi-fold and unfortunately, because of their ubiquity, law firms have become complacent in accepting them as an inevitable part of firm life.

But just because they are common doesn’t mean firms should have to accept the status quo. No firm should have to dismiss earned revenue or go unpaid for work completed. Thanks to advances in technology today, they no longer have to. Here we explore how and why write-offs have grown in number, what their effect on law firms is, and what can be done about it.

Why So Many Write-Offs?

A 2017 article in The American Lawyer explained how, despite law firms experiencing increased revenue and job growth, collected realizations have declined. The article revealed that the higher billing rates law firms have been able to secure over the last several years have been negated by discounts, write-downs, and eventually write-offs.

One of the issues firms deal with is the requirement for some lawyers to act as both project managers and client liaisons. Lawyers are focused on superior client service (i.e. being attentive and available)—not so much focused on collecting the fees associated with superior client service. Firm collection processes are varied, but most firms handle collections inefficiently and without a uniform or consistent internal process. Once a bill is sent to a client, the law firm generally waits 60-90 days on average for payment to be remitted. In the end, the firms sees only $.86 per dollar. If a bill goes unpaid for 120+ days, a firm may decide to offer a discount to the client to incentivize at least partial payment on the bill (otherwise known as a write-down). Should the bill continue to go unpaid and become “stale accounts receivable (AR),” the firm may eventually write it off.

All this isn’t to say that law firms just give up on unpaid bills—they do often try to negotiate with the client. But it’s more typical for firms to provide a discount proactively rather than waiting for the client to ask for a discount as a way to incentivize partial payment. Once the firm proactively offers a discount, the client no longer has incentive to pay the bill as he/she may suspect that further discounts await.

This trend presents significant obstacles to a firm’s health because partner compensation and bonuses are calculated on amount collected—not amount billed. Ironically though, the media reports on billings as the positive indicator of law firm health. Write-offs though directly affect firms’ profitability, cash flow, and partner draws. In simple terms, the firm isn’t getting paid for the work performed. To truly estimate the health of a law firm, one should look at the firm’s collection rate, not billing rate.

What Can Be Done?

The bottom line is that law firms need to get paid for the work they’ve done—in full. While not sexy, the accounts receivable process is one of the most crucial operations in a firm for establishing firm health and the overall success of the business.

Right now, firms typically have no insight into what happens to an invoice once it’s sent to a client, meaning the payment process goes dark. Attorneys and staff members dislike making awkward follow up calls to clients or sending uncomfortable collection emails. These emails often come from the law firm partner, and all of that is manual work, taking away from the attorney’s real job. This is where automation can help. Use the following tips to address your firm’s write-off problem:

Use Automation to Track and Collect Accounts Receivable: Automation offers a controllable, personalized, technology-based solution to AR tracking and collection. With an AR solution that incorporates automated functionality, you can send invoices electronically as per your firm’s usual process, but you will now be able to track the invoice via the solution’s software. This feature helps you minimize your write-offs by enabling you to take action or offer your client specific options based on that client’s behavior patterns. Because automation gives you insight into what your client is doing with the invoice, you can decide how to proceed best to ensure you get paid. For example, your firm can see if a client visits the invoice three times but has not paid. At that point, you can offer an installment payment plan.

Incentivize Clients to Pay With Automated Reminders and Collection Efforts: Automation also helps firms minimize write-offs by enabling you to set automated reminders to email the client and personalize messages to follow up. The ongoing collection efforts are tracked and relayed on your firm’s AR dashboard in real-time. As a result, firm members no longer need to manually collect on overdue AR or track the status of firm collection efforts. You can also incentivize clients to pay using automated options which attach interest rates to invoices after a certain period of time.

See Higher Collection Rates Using Automated, Embedded Payments: The embedded payments option within automated AR software can save a law firm from so many write-offs because it creates a simple, streamlined way for your client to pay. Offering an easy way for clients to pay via embedded payments can be a game-changer because clients would rather pay online and will pay faster if given the electronic option. By collecting faster and making it easy for the client to pay, firms increase their chances of collecting more on the dollar.

Writing off 14 percent of total bills is unacceptable when firms are delivering high-quality, meaningful work for clients. And lawyers’ reticence to be collections agents, hounding clients for payment, shouldn’t be the reason those firms and partners lose out on revenue.

Technology has helped law firms morph in various ways over the last several years, and introducing automation for accounts receivable is an emerging one firms should consider so they can truly see payment for their work performed. Explore automation to not only reject the status quo that says, “losing out on revenue is what you should expect,” but to improve the overall health of your firm for the future.

 

Sarah Schaaf is the founder and CEO of Headnote. She previously worked for various companies including Google, Inc., Hawkins Parnell Thackston & Young LLP, and Walsworth, Franklin, Bevins & McCall, LLP. Sarah holds a Juris Doctorate degree from Loyola University Chicago School of Law and is an active member of numerous legal tech, FinTech and entrepreneurial groups in Silicon Valley including Commerce Innovated, NFX Guild, and Founders For Change. She is also a founding member of the group Silicon Valley Legal Tech.