By Karen Edwards, Head of Professional Development at Legal Futures Associate Institute of Legal Finance & Management (ILFM)
Do you have control over credit or does credit control you?
The ILFM membership has thousands of legal finance professionals in its community and lock-up is often a hot topic of conversation.
Some of our members say they have taken back control of their credit control processes, as the fee earning colleagues are very reluctant to chase clients after the bill has been sent out, even though they have carried out the agreed work. Sometimes there can be a delay in sending invoices out which the accounts team are not always aware of, however if a law firm has good internal communication and procedures the accounts team can follow up. It’s when there’s a breakdown in communication or process that sending invoices and receiving payments can slide.
End of month billing is always a hugely frenetic time for an accounts team, as well as legal teams. If a firm does not have robust processes in place to deal with the raising, delivery and payment of invoices, lock-up increases and credit control processes thereafter need to kick in swiftly as cash is vital, more so than profit! It is often the case that reward is based on billing performance only, however, equal focus and priority should also be given to cash collection performance.
Having robust policies and procedures in place to monitor lock-up and credit control is vital to ensure the level of lock-up doesn’t get out of control. For example, ensure money on account is requested where appropriate, as well as risk assessing clients as to their financial situation, ability to afford and fund your legal fees. Credit checks should also be par for course. Think about allowing payment plans only in exceptional circumstances and with approval of senior leaders first. Consider inserting in your terms of business and other client care documentation clauses to state that, if invoices remain unpaid for more than 2 months – as an example – work will cease until those invoices are paid. Check your software system to see if it allows matter files to be locked in these situations and only re-opened once the debt has been paid.
Do you know how much lock-up your firm currently has?
Do you know how to calculate and monitor lock-up and the impact reducing your lock-up has on your cashflow? In a recent benchmarking survey, the average number of lock-up days for law firms was 136. That is over 4 months where work in progress hasn’t been billed or invoices paid. This means that at least four cycles of salary payments have gone out, as well as all the other expenses that law firms must pay before they, themselves, have been paid.
How does such a firm fund those outgoings? With great difficulty, I am sure!
