Changing the Billing Paradigm – Parts 9: Getting Bills to the Client.

By on July 17, 2011

Law firms can improve cash flow and increase profitability if they improve their billing process and practices.

 The client billing process, in many firms is based on a slow, painful monthly schedule. Why … because it’s always been that way. In part 1 of this series we identified the nine (9) current painful and costly steps to client billing. In this posting we’ll discuss the issue getting the final bill to the client.

Here is how to improve cash flow and profitability by dealing with getting the bill to the client in the shortest possible time:

  1. The issue here is that the firm has done the work, incurred the hard costs and now wants to get paid. Unfortunately the firm can’t get paid until the client has had adequate time to process and pay the bill.
  2. Where possible, firms should try and get enough retainer in advance to cover the next month’s fees and costs. Therefore, there is never an accounts receivable.
  3. The second best option is to get the client to accept an emailed bill. Emailing a “pfd” copy of a bill is a major improvement in cash flow and profitability.
  4. Another option is to provide all client bills on a secured web site like greenlegalbills.com, send them an email with a link that will automatically take them to the site and allow them to download the bill themselves. Emailing bills is no longer a novelty, businesses are doing it everywhere. 

 In summary, the faster a client gets a bill  the better cash flow a firm will have,  and attempt to get all clients to accept email bills instead of paper copies.

 In the final post of this series will briefly discuss delays in the billing process due to personalized cover letters.

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Categories: AFA - alternative fee arrangement, Best Practices, Financial Management, Law firm billing

What are a few days worth ….. A Lot of Cash!

By on November 2, 2010

Law firms are clearly cash machines, truly nice high margin businesses. However, they are somewhat unique in that they operate on a cash basis, collecting cash is really important. Just ask Mary (see my blog postings of July 14 & 15, 2010)

Firms can improve cash flow by implementing best practices and using technology, but what is all this effort worth? If the firm improves collections by an average of 5 days what does it mean in terms of cold hard cash?

This posting will help you understand:

  • How to calculate the Average Collection Period – ACP
  • How much additional cash can be generated by improving the ACP, and a sample Excel report  

Using the Average Collection Period
The Average Collection Period measures the time it takes for a firm to receive payments, thereby determining cash flow.


The above chart can help illustrate the effect that a change in the average collection might have on the investment in accounts receivable for your firm. Remember, accounts receivable represent money that cannot be used for other cash outflow purposes. For example, assume that the average daily billed amount is $10,000 and that your average collection period is 40 days. Now assume that you were able to reduce your Average Collection Period from 40 days to 30 days. From the illustration above, you can see that the reduction in the Average Collection Period reduces the investment in accounts receivable from $400,000 to $300,000. This reduction generates an additional $100,000 annually in cash flow.

 Measuring the Average Collection Period
The Average Collection Period measures the length of time it takes to convert your billings into cash. This measurement defines the relationship between accounts receivable and your cash flow. A longer Average Collection Period requires a higher investment in accounts receivable. A higher investment in accounts receivable means less cash is available to cover cash outflows, such as paying partners.

The Average Collection Period is calculated by dividing your present accounts receivable balance by your average daily billed amount:


The average daily billed amount is computed by dividing your annual billed amount by 360:


Using the annual billed amount and accounts receivable balance from the prior year is usually accurate enough for analyzing and managing your cash flow. However, if more recent information is available, such as the previous quarter’s billings, then use it instead. Be sure to compute the average daily billed amount correctly using the number of days actually reflected in the billed figure (e.g., 90 should be used if a quarterly billed amount is used).


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Categories: Best Practices, Financial Management, The Legal Market

Stop sending those paper bills …. Please!

By on October 27, 2010

Here’s a question for law firms … Do your clients want paper bills?

 The answer …. NO!

 This is the digital era, many clients want bill in a digital format.

 More and more corporations are requesting law firms send them bills in a digital format, PDF being the most requested. These corporations have long ago adopted e-Payable systems that require all bills to be imaged and processed via workflow for payment approval.

 Why companies want digital bills:

  1. The email with PDF attachment can be routed to a specific person with much tighter security and less costs than the normal mail room handling.
  2. The PDF file can be immediately loaded into the e-Payable system, saving a costly and delayed scanning process. Confidentiality is also a much tighter.
  3. The bill will arrive sooner. See my blog post explaining why this is a benefit.
  4. If the GC or legal staff needs to print the bill for review they can do it themselves.

 What can law firms do?

Set your time and billing system to automatically email bills as PDF attachments to clients. The law firm also benefits by getting bills out faster, faster payments and substantially reduced costs. Did I mention “going green” by reducing paper and power consumption? One keystroke can send thousands of digital bills.


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Categories: Best Practices, Financial Management, Going Green, Law firm billing, Productivity, Technology, The Legal Market

Amazon, Charles Schwab, Blue Cross and Bank of America allow it …… why doesn’t my law firm?

By on October 11, 2010

We are all getting to be pretty sophisticated consumers these days and we expect on-line access to our accounts where we spend or save money. None of us would consider maintaining our bank or brokerage account at an institution that didn’t offer a way to manage our account on-line. Yet, the vast majority of law firms in the US haven’t begun to offer even their best clients this courtesy. Why?

Here might be some reasons excuses:

  1. We don’t trust on-line access. Really, you already have your personal money, credit and highly confidential information on-line, either you trust secured access or you don’t.
  2. We can’t afford or don’t understand this technology. Vendors are now offering this technology at substantially reduced costs. The technology is almost identical to your firm’s web site, but secure.
  3. We don’t feel comfortable putting confidential client data in the cloud. This is not a problem, many systems will allow you to host the portal on your site, the data never leaves the building. It’s only viewed remotely.
  4. We don’t want our clients to see what they are spending on legal services. Now we are getting close to the real excuse. Trust me, clients know what they are paying your firm. Your hope is that they view your services as “high value”.
  5. Clients don’t want to see all this stuff. Really, did you ever ask them?

Law firms talk about forming relationships and “collaborating” with clients but stop short of providing them on-line access to their account. Progressive law firms will seize this opportunity to be one of the first firms to give their clients the VIP treatment, on-line access to their account.



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Categories: Best Practices, Financial Management, Going Green, Law firm billing, Technology, The Legal Market

Do We Agree on Billing Realization – NO!

By on September 19, 2010

The partners are gathered around the table and on video conference screens from all the remote offices. It’s end of the third quarter, business is slow, year to date recorded hours are close to budget, but billings are below budget. The finance partner with help from the CFO is presenting an analysis of the firm’s financials. Maybe we have a billing realization issue. Maybe we should compare our firms billing realization to other firms, or to a study done by some consulting firm. Value of time recorded: $11,000.

 Beware what you are comparing! There does not appear to be a set of standards that all firms agree to for such a common measurement of performance as Billing Realization.

To prove the point, let’s take a look at a simple example to illustrate how wide the gap can be between commonly used formulas.

Example: The firm records $11,000 in fees, writes off $1,000 of WIP and then bills the client $10,000. The client pays $9,000, and the firm writes off the $1,000 AR balance.

Details: 
WIP write-off: $1,000
Value of time billed: $10,000
Fees billed: $10,000
Cash collected: $9,000
AR write-off: $1,000

Common Method #1:

Billing Realization = (Fees Billed – AR fee write offs) ÷ (Value of Time Billed + WIP fee write offs)

($10,000 – $1,000)/ ($10,000 + $1,000) = 82%

Common Method #2:

Billing Realization = Fees Billed ÷ Value of Time Billed

($10,000 / $10,000) = 100%

Accounting and Finance for Law Firms at 2010 ALA Conference.

Common Method #3:

Billing Realization = Fees Billed ÷ (Value of Time Billed + WIP fee write offs)

($10,000)/ ($10,000 + $1,000) = 91%

Lesson Learned:

Be careful when using financial comparisons to other firms or national surveys. Unless the same calculations are used the comparisons may have little value.

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Categories: Best Practices, Financial Management, The Legal Market

Going Green in the Accounting Department

By on September 1, 2010

Law firms use a substantial amount of paper along with outdated processes in the accounting department. Firms, of course, have been imaging documents for many years, however most of this has been in the area of litigation or other departments focusing on client work. Much of this imaging is potentially billed back to the client in one fashion or another. One area that is normally left-out when considering efficiency and “go green” efforts is the accounting department. Firms incorporating imaging technology in the accounting department can improve their efficiency and ultimately reduce costs.

Images that are scanned for use in the accounting department should also have the right meta data or data “tags” provided by the system for easy inquiry and retrieval.

Here are some imaging applications that make sense for the accounting department along with suggested data tags:

  1. All client bills should be automatically stored as an image in the time and billing database. The entire firm needs instant access to client bills and statements in a PDF format without hunting through file cabinets and off-site storage. Data tags should include client number, matter number, invoice number, invoice date and accounting period.
  2. Vendor invoices of client chargeable hard costs should be stored and automatically printed with each client’s bill (see blog dated 8-25-10). If the firm has implemented an on-line e-Payables system, the same image may be used by the billing department. Tags should include client/matter, vendor, voucher # and Voucher date.
  3. When a client sends a law firm a check either as a retainer deposit or to pay off accounts receivable, the firm should image a copy of the check.  Data tags should include client number, matter number, payor, check #, check amount in $, accounting period and transaction date.
  4. Similar to a client check, all firm checks should be imaged and stored with the appropriate GL entry. Tags should include, check #, payor, check amount in $, accounting period, bank account and transaction date.
  5. Once all the cash is posted into the system each day, the firm should image a copy of the bank deposit slip. This should be linked to the general ledger cash account and contain the following data tags, bank, accounting period and transaction date.
  6. If the firm processes any IOLTA checks or other Trust money, a similar process should be used to image a copy of all checks and link them to the transactions in the Trust Accounting module. Data tags should include, client/matter number, payor, check #, check amount, accounting period, transaction date and a name of the Trust account (bank description). While handling Trust funds the firm may already have a process requiring written authorization to apply Trust funds to a client’s statement, the Trust authorization form should also be imaged into the system and attached to the transaction.
  7. Other imaging examples might include client engagement and client conflict waiver letters that are used by the billing or accounting departments.

Law firms use of imaging technology in the accounting department can help reduce the cost of copies, storage and eventually retrieval.

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Categories: Best Practices, Financial Management, Going Green, Productivity, Technology

Understanding Accounting Dates – Can you answer these questions?

By on August 5, 2010

Law firm managers and attorneys need a basic understanding of how accounting systems uses various dates and the impact these dates have on their clients and financial statements. Today’s law firm accounting systems (including time and billing) are all very sensitive to how transactions are “dated.”

Transaction Dates – these are the “effective dates” of the transaction, not necessarily the date the data is entered. For example, an attorney actually enters billable time into the system on July 6th for work that was actually done on June 30th. The Transaction Date (date of actual work) would be June 30th, there may be an audit trail in the system that shows a “system date” when the actual entry was made which would be July 6th.

Accounting Period – a firm defined range of dates, usually a complete calendar month. Some firms may define different dates, for example a “month end” always ends on the last Friday of the month, except in December. Even thought the Transaction Date of this time entry is June, in all likelihood, the June accounting period has been closed and the transaction will post to the July Accounting Period.  In our time entry example above, the time entry belongs to the July Accounting Period even though the transaction date is July.  However, if the June Accounting Period is still open, many accounting systems will go post this transaction to the June Accounting Period because the transaction date falls within the predefined date range for the June Accounting Period.

See if you can answer these questions based on a June Accounting Period, ending June 30th.

  1. The firm gets a very substantial check in the mail July 1st, the check is dated by the client June 25th. Does the check get included in the June Accounting Period?
  2. July building rent is due at the landlord’s office by July 2nd, the firm cuts the check and mails it on June 25th. The check shows a July 1st date on the check. Is this a June Accounting Period expense?
  3.  The firm finally gets all the pre-bill edits done for June bills and print the bills on Monday, July 19th , they go in the mail on July 20th. Are these considered June or July bills (Accounts Receivable)?

Answers

The first caveat is that firms are not governed under the same accounting standards (FASB, GAAP, SEC etc.) that apply to public companies. Secondly, a basic rule in accounting is consistency in handling transactions. In addition, some law firms do really strange account ting things, since there really isn’t any oversight.

  1. As a best practice, the firm should post this with a July Transaction Date belonging to the July Process Month unless the June Accounting Period is not closed.
  2. Even though the check was printed in June, the Transaction Date was shown to be July 1st and therefore this belongs to the July Accounting Period, …. A July expense.
  3. This billing issue is usually depended upon the Transaction Date the firm actually prints on the bills themselves. If the firm shows a June date printed on the bill it will post to the June Accounting Period if that period is still open in the accounting system. If however, the firm prints that July 19th date on the bill, July 19th becomes the Transaction Date and the bills are deemed to be in the July Accounting Period. This can also be important because in most systems the AR aging process is based on the date printed on the bill.

Do you agree or disagree with these answers? Let me know.



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Categories: Best Practices, Financial Management, The Legal Market

Law Firms are Not Banks – Managing the Cash Cycle with Accounts Payable

By on July 12, 2010

Law firms are not banks. Banks are able to borrow money at almost no cost, and of course make money by charging interest and fees. Firms today are facing increased constraints in their management of cash. Unlike banks, they make very little or no money on their “loaning” of money to clients in the form of client chargeable expenses. Firms need improved processes and tools to better manage cash flow.             

The 2008-2010 economic downturn has resulted in a drop in billings, stretched out client payments and tougher access to lines of credit. One often overlooked source of cash is accounts payable, and the management of the overall spending process.

 Let’s take a look at the three-part Cash Management Cycle of a law firm. This cycle includes two assets and a liability; work in process (inventory), accounts receivable/collections and accounts payable. Accounts payables and the entire spend management process is often under managed.

 There are three ways firms can manage the overall cash spending process:

  1. Get more cash in advance, or keep from using firm cash for client expenses.
  2. Better manage the spending approval process with accountability and approvals.
  3. Better understand and manage actual cash payments.

 Here are some tips for getting more cash in advance or using less firm cash:

a)     For large client chargeable expenses such as outside experts or expert witness fees, financial audits, and so forth, arrange with the client for a direct payment “pass through”. In this case the vendor bills the firm for the expense, the firm approves the invoice and passes it directly to the client for payment. This way the firm never records the expense on its balance sheet and is not liable for payment. The firm should have the AP system track this pass through so as to respond to any vendor inquiries. Make sure the vendor understands the “pass through” process.

b)     Many clients are resistant to providing firms with big retainers, especially when they see the retainers being used for fees. Negotiate with clients to provide retainers designated for hard-cost expenses only. Your bill should always reflect expense retainer activity along with an image copy of each vendor invoice appearing on the bill. Your accounting system should handle this.

c)     Negotiate where possible with vendors providing client chargeable services that the firm will pay vendor invoices when the firm’s clients pay. Assure the vendor that all funds paid by the client will first be applied to “hard-costs” before firm fees are paid. Your system can automate this entire process without special handling.

Here are some tips for managing the Spending Process:

a)     Implement a process requiring vendor invoices be approved by the person requesting the products or services along with at least one level of management. For example, a secretary and her billing attorney would approve an invoice for special outside copy expenses. It’s amazing how many invoices do not accurately represent the services either ordered or provided. An AP clerk would have no way of knowing this level of detail.

b)     Make people with spending budgets responsible for approving invoices. If a marketing manager has a budget and incentive for operating within budget allow the manager to have approval for all invoices being charged against this budget. Many firm managers with spending budgets never see or approve invoices prior to payment. They only see reports showing actual to budget performance periodically throughout the year. They never are engaged in approvals.

c)     Today’s accounts payable systems can easily align spending with management goals. Workflow technology allows staff and attorneys to approve all expenses before they are entered into accounts payable. Imaging of vendor invoices reduces costs and makes this process much easier.

 Here are some tips to better understand and manage actual cash payments:

a)     Understand your Average Payables Period (APP). APP is calculated by dividing the firm’s annual payables by 365 days, this provides the Average Daily Payables (ADP). Then divide the current accounts payable balance by this average to get the Average Payables Period. Can the firm increase the APP from say 30 to 40 days, generating an extra 10 days’ worth of ADP? You’re system should classify vendors who will allow their payables to be stretched, take advantage of their generosity.

b)     Negotiate for vendor discounts for faster payment cycles. For example ask the vendor for a 2% discount for payment in 10 days. This works well if the firm has reasonably good cash flow. Firms use to make money on bank “float”, interest made on short-term cash reserves. This is no longer the case and cash discounts for early payment might look attractive. Ask your vendor if there is an additional discount for ACH payment since it is quick and eliminates paper check processing.

 Law firms are not banks, “Cash is King” and firms can better manage their cash flow by better managing  the accounts payable process.

 

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Categories: Best Practices, Financial Management, Productivity, Technology, The Legal Market
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