money circles

Profitability is not just about hours billed, it's about the amount collected. Collecting just $0.86 per dollar is one of the biggest—if not, worst—contributors to lower law firm profitability. Firms struggle with the collection process, which makes maintaining profitability difficult. And certain obstacles are particular thorns in the side of the firm waiting to be paid.

First, accounts receivable is often the last priority for attorneys. It's the least sexy aspect of running a law firm, and for some it is the most unpleasant. No attorney wants to chase clients for what they're owed—those conversations are awkward and easily ignored. Casting collections to the wind can result in a drawn-out payment process, often resulting in bills going well beyond the typical 60-90 days for remittance.

Second, if a bill goes unpaid for 120+ days, most firms will offer a discount to incentivize clients to pay a partial amount of the bill (known as a write-down). Here is where the firm sees $0.86 on the dollar (and often less) if they do get paid. If the bill continues to go unpaid and become a "stale accounts receivable," the firm may eventually write it off, collecting nothing at all.

The good news is none of these collection obstacles have to be a part of typical law firm life. Technology has changed the accounts receivable process for businesses in almost every industry, and legal is no exception.

|

How Technology is Revolutionizing the Collections Process

Accounts receivable (AR) technology can automate the collections process to remove the most time-consuming elements. A few of the ways it can help is by:

  • Automating collections functionality including personalized, ongoing email reminders to clients until they pay their bills in full;
  • Providing insights into whether or not clients receive or open invoices using a client activity tracker;
  • Giving you real-time status of all automated collection efforts related to a particular invoice;
  • Simplifying actual payments in an easy, compliant way; and
  • Setting up recurring and installment payments plans customized to the schedule you need.

Leveraging these tools and features makes accounts receivable a painless, auto-piloted activity. I recently spoke with Joseph DelliBovi, an accounting manage at Perry & Alznauer, P.C., who has implemented an automated AR solution at his firm. He provided insight into how technology has changed his collections processes for the better.

"Accounts receivable processes that were once cumbersome and time-consuming are now hands-free operations that occur behind the scenes of a firm's day-to-day life," he said. "Firms can use automated reminder functions, client activity and analytics functions, and various payment methods to easily remind clients of payments due or to simply collect payment. What used to be a one or two-week wait time for collections is now a 24-48 hour wait time."

|

Data Paints the True Profitability Picture

It's difficult for firms to know how financially healthy they are because billings are often used as the metric for firm health. The more billed, the healthier it's assumed a firm is. Write-downs and write-offs directly affect a firm's profitability, though, so the volume of billings is not the accurate indicator of firm health. To truly know the health of a law firm, partners should look at the collection rate instead of the billing rate.

AR technology provides data that can help firms get a more accurate view of their health. Certain AR solutions offer a customized dashboard with real-time AR and payment activity data. With features including historic receivables and payment data—in addition to predictive analytics on future receivables and cash flow—a firm can get real-time visibility into its profitability. Using outstanding payment and AR data at a client, matter, or firm-wide level can enable firms to make strategic decisions about their collections needs and processes.

"Ultimately, AR balances that were once large and overwhelming become manageable, and the awkward interactions required to push along collection efforts become friendly follow-ups," said DelliBovi.

The capabilities AR technology provides to law firms changes the game for them and their collections. Ensuring you get what you're owed has never been easier or as painless. Using such software has enabled law firms to get paid faster and prevents the devaluing of their dollar. This technology will set a different stage for law firm profitability across the board in 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.