Unlocking your lock up

Some legal firms are still too focused on work volume rather than profitability and have been criticised for not adopting strong client engagement and credit control policies which have led to cash flow difficulties and in some cases insolvency.

Strong and sustainable cash flow is essential for any successful business. One of the most problematic areas of cash-flow management for law firms is their lock up.

Lock up is made up of unbilled work in progress, unpaid bills and unbilled disbursements. In reality, it is the time that it takes you to turn the first hours of chargeable time on a client to cash received into your office bank account.

You can therefore see how excessive lock up can be detrimental.

Legal firms must approach their financial management along the same lines as commercial businesses and there are a number of things they can do to improve lock up.

New client engagement

Your new client procedures should assess the financial risk of the new engagement. This should encompass credit checks if you are not taking payments in advance.

You should be advising your clients of the expected fees to be charged, but some clients are now expecting you to agree fixed fees. If you are agreeing a fee quotation in advance, then at this point you should be preparing a fee budget that computes the time cost of completing the work and the expected profit from that matter.

It may be worth setting a target profit per matter of say 75 per cent, with any expected recovery below this amount having to be authorised in advance by the COFA or other senior manager.

If you are accepting a lower level of profitability then is this because you are completing a ‘loss leader’ matter, perhaps hoping to attract other more profitable work on the back of this? If so, then again get authorisation in advance.

At the engagement stage, you should also clarify what work you will be completing within the fee structure, and agreeing that any additional work required by your client, that was not included in the initial quote, will be quoted for separately before work commences.

Consider requesting advance payments from your clients, at least to cover disbursements that you know will have to be paid.

And remember, everything you agree with your client should be included in your client care letter.

Billing policy

Discuss and agree your policy with your clients, so that delays in making payment against your fees are reduced. Your client may be happy to receive monthly fee notes, but unless you ask, you may not know.

Ask how you are going to invoice your client to get the payment in quicker. At what point during the matter will you bill your client? Will it be on a fixed-fee term? How long will it take for the invoice to reach the client and be authorised for payment? Are you sending this to the right person to avoid delays? Can you send an electronic bill and cut out possibly four days from the cycle?

Clients do not appreciate unexpected bills
so discussing these points with your client at
the outset will help prevent late or non-payment
of fees.

Payment terms

As well as talking through your client’s preferences in terms of billing, you must also cover the thorny subject of making payment.

• Fixed fees. Where a fixed fee has been agreed with a client, you could also arrange a payment plan which breaks the fee into smaller monthly payments throughout the matter up to completion. This may help cash flow for both you and your client.

• Time-served fees. Where matters are billed on a time-served basis, you may wish to discuss this with your clients and agree to bill more frequently. Monthly automated billing may become the norm, where your system downloads hours charged at the agreed charge-out rate to a billing template.
• Payments on account. Consider asking for payments on account before you start any work or throughout the matter if you are not interim billing.
• Payment cushion. Consider holding a fixed-level payment on account from your client. Raise interim fee notes and request payment of these. The ‘payment cushion’ will reduce the risk of non-payment of fees under riskier matters at the completion stage.
• Fourteen-day rule. Make sure that your firm’s policy of drawing client account funds to pay costs is not left until the end of the 14 days that the SRA Accounts Rules designates as the limit. If you have properly given your client ‘written notification of costs’, then transfer the payment.
• Online payments. How easy do you make it for your clients to be able to pay you? Do you have an online system through your website so that a client can pay you by credit card at midnight if they so wish?

Credit control policy

Set a credit limit for each client, based on the type of work you are conducting, and stick to it. This should not only be done for billed work but also for unbilled work.

When the time recorded on a matter hits the agreed credit limit, your system should prompt for a bill to be drawn up. Only agree to extend credit terms if a client has a good track record
for sticking to payment agreements.

If a client has a history of slow payment, changing the payment terms to a monthly payment plan, say, or even eliminating credit entirely may be necessary. You should also consider charging interest for late payment.

Your bills should clearly state the payment due dates and you should send regular statements, clearly stating which bills are overdue. Fee earners should be made aware of non-payers so that they do not carry on work for that client.

There should be regular debt chasing and credit control procedures should be followed as a commercial business would and not allowed to be overridden by partners.

Ongoing lockup management

Fee earners should be given chargeable hours targets, which must be reviewed and deficiencies followed up by management.

Billing targets should be set for fee earners.

Diarise monthly meetings with fee earners to discuss work in progress and pledge fees to be billed for the month ahead. Track this and review delays in billing.

Billing recoveries, or profit per matter, should be calculated and reported on. The firm should set a standard level that they expect to be achieved and fee earners should be expected to report on those fees billed at lower levels.

Although you need credit control procedures, fee earners should be responsible for their own client debt collection.

Consider allocating diary slots purely for
billing and debt collection so that their importance is highlighted.

These should all form part of ongoing fee-earner key performance indicators and remuneration can be tied into achievement
of targets.

Benchmarking

The 2013 Law Society LMS Benchmarking Survey has reported that average lock up across the country is 177 days, compared to 182 days in 2012. This is quite an alarming statistic as it shows that work is taking nearly six months to be converted to cash.

Think of it like this, if your firm has an annual income of £5m and debtors and work in progress of £2m, your lock up currently stands at 146 days. This means it takes nearly five months to convert work in to cash.

If you improved your lock up by 26 days this would improve cash flow by over £350,000. SJ

Karen Hain is a partner and head of the professional practices department at chartered accountants Moore and Smalley www.mooreandsmalley.co.uk

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