Automate Your Firm’s Cash Flow System to Avoid Losing Money

Cash Flow System

Do you have a system in place that tracks how much money your law firm is bringing in daily, weekly, monthly, quarterly, and even annually? Do you update your clients as they go through the Perfect Client Life Cycle? If not, this post will help you get started on automating your cash flow system. 

Attorneys know how challenging it can be to collect legal fees. In fact, lawyer fees are a common complaint in the Office of Bar Counsel. Fee dispute resolutions are often avoided only when the attorney is able to provide a written explanation and itemization of charged fees, or by going through fee arbitration (mediation). Ideally, you’d want a payment policy where clients must first give full payment prior to receiving your legal services. But in reality, you are seldom paid in full once retained and clients usually lookout for firms with an initial minimum payment, zero down, or those offering installments over a longer period. 

To avoid the consequences of an inefficient cash flow system, law firm consultant Richard James shares tips on how to start a collections system in your legal office and how to check if systematizing collections is working for you. 

How can I start a cash flow system? 

Cash flow systems should not be initiated with you going after delinquent payments clients or going after clients with past-due bills. Rather, you should take the lead and make things easier and more convenient to pay on time than paying late. Below are three points to keep in mind if you want your payment system to become more effective. 

  1. Wealthy business owners are paid in advance for their services.  Ensure every case you bring on has a payment plan. If not, you are allowing someone who is not very good at managing their own money, to manage the cash flow of your firm.
  2. Proactive communication with clients who owe the firm money is vital.  Don’t wait until the client misses their payment before communicating with them.  Rather start communicating with them proactively from the very first day.
  3. Inspect what you expect by report.  At the minimum, each week you should have a report of which clients are “on-plan” vs. which clients are “off-plan”.  This will allow you to set goals as to the percentage of on-plan clients you want to have and provides your team with the transparency they need to do their job.

Aside from these main points, you should also keep the following list in mind:

 Cash Flow SystemLate penalties. Written retainer agreements should clearly indicate what will happen if the client misses a payment for a certain number of days and how you calculate the late fee. If you decide to allow a grace period, make sure it’s short and the client will not be charged any late payment fee. 

Automatic charging. You can automate payments as soon as you get the client’s approval to automatically charge the amount due on his credit card on a set day each month. This greatly decreases late payments as you are in control of the collection process. 

Invoicing. Your billing cycle should be short. Send out invoices regularly and frequently and include the total amount that must be paid to every cardholder.  Smaller and more frequent invoices are easier to pay than larger ones.

Payment Reminders. Following-up through phone calls or sending text messages should be part of your routine. Clients are busy just like you and they may appreciate being reminded ahead of time if their payment is not received, not paid in full, and how much their past due balance is (if any). Debt collection can even be automated. One model is to give a 10-day, then 5-day, and then a 3-day payment due notice. 

The ultimate goal is for late payments to be prevented from even occurring, preserve your cash flow, and get paid on time.  

Is Your Collections System Working? Here are some markers.

As law firm managers, it is important to check on your collections to make sure that you are not losing money because of bouncing checks, late payments, client insolvency, or attorney fees that are not paid in food. Check your system against the list of markers for a good law firm collection system.

Clients pay bills regularly. The first sign that you need a law firm system in place is if your clients aren’t paying you, ro are paying you but not on schedule. If this does not apply to you, revisit your written fee agreement and check if you are clearly communicating your payment plan and defining your attorney-client relationship. 

Client payment history is tracked. For solo firms, having an ineffective collections system can be devastating to your cash flow. Part of being an effective law firm is monitoring client payments to help you determine whether to terminate the representation. You can refer to the ABA Code of Professional Conduct to check what you can regarding non-paying clients without receiving a bar complaint (which you may have to pay through pro bono services).

You Have a Collections Policy. If you don’t have a written policy yet, create one and include this in your engagement letter and agreement on fees. Below are some important points to include in these collections documents: 

  • Law firm’s credit terms
  • Tracking system for late /missed payments and overdue funds
  • When the firm will (1) reach out regarding payments that are missed (2) follow-up unpaid bills (3) cease client representation for nonpayment

Attorneys are incentivized for collections. Involve everyone in your pursuit to not lose a dime due to missed collections. Reward your associates or staff who are able to stay on top of client collections. 

Collections are automated. When you automate collections, you prevent missing any balances from beginning to end of the case. You should also communicate to your clients how your collection systems work. The first step in the process is when a client completes the initial consultation or decides to hire you. The next step is when you present your service agreement. As soon as this is signed and the prospect becomes a client, the invoice should be automatically generated and the process of collection begins. 

Payment information is double-checked. It is possible that the client intended to pay but the debit card or credit card information was entered incorrectly. There is no closed-loop system when errors abound in your database. Make sure the names, card numbers, and contacts numbers on your database are verified.

Other markers you can look into are the key performance indicators you’ve set when you started the business. If you haven’t laid this out, check out the “Seven Key Performance Indicators” you can monitor to ensure your practice is headed in the right direction, available from the free book “The Attorney’s Guide to Personal and Financial Freedom”. 

Are you dealing with non-paying clients?

When there is a written agreement signed prior to payment, it is easier to stop working for the client instead of trying to resolve the issue or even reducing your fees. When you send out invoices, present documentation explaining the fee breakdown, expenses, or costs charged. Clients who complain about overcharging may simply be trying to score a discount. This is why talking to your clients in person or over the phone is also important. 

As the law firm owner, you should train your office staff to handle follow-up calls for missed or overdue payments. The call should help a client recall why he/she chose to retain your firm and what the payment terms agreed were. 

If you are constantly dealing with client non-payment issues, then it's not too late to create an automated system for your firm. If you want to make your law practice more predictable, Richard James can assist you in creating systems that can run your law practice. Contact us today.

Richard James

As a result of his track record for achieving what most describe as “phenomenal” growth rates for his clients, Richard James, CEO of Automated Business Results, LLC, is quickly gaining a national reputation as “the Legal Systems Expert.” His secret to success is simple. Richard has devised a seven step system for designing and implementing automated marketing systems that grow your business FAST. If you’re looking to develop a practice that supports your lifestyle rather than completely undermining it, call Richard James today.

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