Partners, don't let your firm manage you
Strong corporate governance coupled with a robust credit control policy will greatly assist in cash management, writes Viv Williams
Managing working capital is becoming increasingly important to all law firms, whatever their size.
Many firms could actively reduce their borrowings from the bank or other parties if they controlled the flow of cash into their business. It is essential to incorporate a billing discipline with all fee earners and ensure these are both timely and accurate – it only takes one mistake for a client to use this as an excuse for non-payment.
Wherever possible, clearly inform all clients of your payment terms and do not be afraid to impose a strict credit policy. Many firms are introducing payment terms within seven days from date of invoice and most clients accept this: after all, if you go into a supermarket for a loaf of bread you are expected to pay for it before you leave the shop. Similarly, once you have completed the work you should expect payment immediately.
This is easier to introduce to new clients and your letter of engagement should clearly state your terms of business but informing all clients of your terms should be part of an ongoing education programme.
The Pareto principle applies to most law firm debt; 80 per cent of clients will pay and this will be collected without much effort, but it is the remaining 20 per cent that pushes lock up back and a sophisticated system is needed for the remainder.
It is essential you invest in a strong credit control department with a disciplined approach to dealing with the delinquents; investing in qualified and experienced staff will significantly reduce your debtor days and improve your bottom line. This is not an exercise to be left to fee earners; they simply will not call their clients to ask for money. However, a close relationship with senior fee earners is essential towards this team effort with your credit control department.
Developing a credit control module with robust reporting will help with setting targets on cash collections, discounted bills, and write offs. The most sophisticated firms are running their debtor days at around 35 days across the firm and the impact on profitability is staggering.
The other important policy is managing fee earners’ time and billing – we often hear that the optimum time billed by fee earners is 1,100 hours per annum. Yet many are getting nowhere near that target. The average is somewhere around 800 billable hours. Allowing for holidays, bank holidays, and weekends, a fee earner has over double that time available to them to bill – so why does this happen? Is it insufficient work coming into the firm to keep the fee earners busy, or are fee earners using their time for marketing or management purposes?
Sadly, in many law firms, partners are not managing their business but letting the business manage them. Building a modern firm is not easy but if we are to give exceptional service to our clients, we have to provide exceptional levels of client care and service; only then will clients remain true and come back with more work.
Finding the right fee earners is similarly not easy and developing the culture of the practice that will enable them to flourish is a long-term objective. Many firms are developing fee earners themselves but unless you create a culture of performance, and make your firm an exciting place to work, the good people will be poached.
Good lawyers with mutual trust and respect need career paths with rewards, challenges, and the chance to develop relationships with clients. All this makes it difficult for them to leave you.
The market place is demanding legal services at a more sophisticated level and firms that provide exceptional client care and service are the ones that will survive and thrive. Clients do not mind paying a premium for that level of service but you have to ensure that every lawyer delivers that level of service every time they engage with a client.
Viv Williams is legal services director of SIFA 360
