Write-offs obviously are detrimental since they mean your practice is missing out on well-earned revenue. But write-offs are also harmful because:
Lawyers are accepting them more and more, causing profitability margins to take a big hit.
They skew the true perception of financial health since revenue reporting is based on billings, not the amount collected.
They prevent partners from earning their rightful compensation and bonuses because those are calculated on the amount collected, not the amount billed.
Lawyers’ write-offs average as much as 14% of their total bills, meaning they are only collecting 86 cents on the dollar.
And write-offs are becoming even more common. An article in The American Lawyer detailed one reason for a decline in collections over the past few years: the fact that lawyers are having to perform both as client-facing liaisons and project managers.
Lawyers don’t want to project manage, and they certainly don’t want to get mired in collections. To avoid those difficult conversations when a bill goes unpaid for 60, 90 or 120-plus days, they most often offer a discount to incentivize payment.
A Total Loss? Best Practices for Reducing Write-offs
To mitigate the impact of write-offs — or even having to accept a total loss — aim to employ the following best practices (and the technology to support them).
1. Initiate Interest Fees on Late Payments
Often lawyers preemptively offer discounts on late bills simply to get clients to pay. However, this leaves the client with little incentive to pay. And it could even lead to an assumption that more discounts await the longer they hold out. Adding interest fees to late payments becomes an automatic incentive since the client will continue to watch their bill grow the longer they wait. Fortunately, adding interest fees doesn’t mean more work is required to update those invoices. Various software solutions offer the ability to track bills and their collection status for easy management. So with the right accounts receivable software, lawyers can take action on late payments to more effectively incentivize client response.
2. Provide Various Payment Options
Streamlining the methods through which clients can make payments further incentivizes them to pay those bills. If you’re only offering one or two methods for payment — and none of them are online or electronic — consider automated payment technology. With online payment as an option, clients will not be able to point to user-unfriendliness as a reason to stall. By making it faster and easier to pay, you increase your chances of full remittance.
3. Create Better Billing Habits
There are smart ways lawyers can alter their billing practices to create a better payment experience for clients. Start by creating consistent invoice dates. You don’t need to hire an AR person to do so — instead, you can use software to automate the times of the month in which you send invoices. Creating an expected billing period will give clients a better sense of when payment is due, and your practice will look more efficient and organized. Make sure to provide enough detail and explanation of charges as well. When clients are confused about line items on their bills, they are more likely to delay payment or put it out of their minds for addressing later.
4. Change Your Mindset About Accounts Receivable
Accounts receivable is certainly among the least sexy functions of a legal practice. Yet to reduce write-offs, attorneys need to change their perspective about this crucial function. Instead of it being a necessary evil, it can become a stress-free process with the right technology. For example, using AR technology that automates the collection process through features such as personalized emails and tracking client activity in real-time can transform how you collect on overdue bills. This most insidious part of the AR process then becomes a painless, auto-piloted activity.
Offloading manual parts of the AR process in this way also allows lawyers and staff to spend their time strategically contributing toward high-value work instead of spinning their wheels with nonbillable busy work.
Technology has changed the AR process for businesses in almost every industry — and legal is no exception. Look for ways to leverage the best technology available to collect on your hard-earned work, and ultimately ensure the future health of your law practice.