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Accounting and Financial Planning for Law FirmsLJN NewslettersNewsSections

Take Ownership of Your Firm's Accounts Receivable

By Ed Poll
April 27, 2012

For every law firm, “The Business of Law'” is driven by a three-part cycle. Lawyers must, in turn, win the work (the “marketing” function); do the work effectively and efficiently (the “production” function); and get paid (the “collections” function). These three functions are distinct and separate. Most lawyers are familiar with and capable in marketing and production, but they fail to grasp the importance of collections.

The real need is to balance the three functions which define what I call the “3Dimensional Lawyer'.” Too often, lawyers over weight the marketing and production sides rather than receivables. They equate financial success with billable hours ' the end product of marketing and production. Any lawyer's solvency rests not on billable hours, but on the amount of cash that is realized from those billable hours. Realization is simply the percentage of what is billed that is actually collected. Generally, the greater the billings, the greater will be the resources needed to do the work. Since the time between when a firm sends out a bill and when it receives payment averages more than four months nationally, the more client invoices a firm has outstanding, the tighter the cash flow and the greater the need to focus on accounts receivable and their collection. Failure to do this will necessitate either a reduced lawyer (equity lawyer) draw (compensation) or increased debt to carry the firm while waiting for payment.

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