While it is true that law firms, especially big corporate firms, can generate significant amounts of money, the popular TV shows and movies depicting the legal industry as awash with money are not entirely accurate. In reality, many law firms operate without significant cash reserves, which can put them at risk if payments are late. Additionally, the vast majority of the legal sector is made up of smaller, more vulnerable firms
It's not uncommon for these firms to struggle with frequent late payments from clients. This can significantly strain their finances and put them at risk of insolvency.
To put that into context, one in five insolvencies is attributed to late payments, and around 30% of invoices are not paid within the agreed terms. Since the start of the pandemic in 2020, the number of invoices paid late has risen by a staggering 209%, and simply chasing these late payments cost businesses £684 million a year.
Since good customer relationships are arguably more vital to a legal firm than any other industry, firms are sometimes reluctant to put too much pressure on clients to deal with their late payments.
This leaves many legal firms with no other option than to use invoice financing or explore different forms of financing to cover their cash flow issues, which can be expensive and increase the risk of insolvency.
So how can law firms walk the line between keeping their clients happy and ensuring that their bills are paid on time?
Read on to discover eight simple strategies for tackling late payments and improving cash flow at your firm.
Send out invoices to clients promptly
The first step in any effective accounts receivable process is to ensure that your invoices are issued promptly and entirely accurately.
Accuracy is paramount for law firms, where hours invoiced can cover a wide range of complex work. Mistakes, even minor ones, in an invoice can result in delays that could seriously damage cash flow.
Spending a little extra time to ensure that all invoices are accurate can save a lot of time and money by reducing disputes and, therefore, late payments.
Sending your invoice in a timely manner sets the tone for a healthy working relationship with your clients. A dependable and consistent invoicing process will encourage customers to process payments quickly and efficiently.
Invoicing best practices
If you're struggling with how to create an invoice or just want to ensure that you are taking the right steps when it comes to invoicing, here are some tips that can help:
- Be accurate and complete - Ensure all details, such as the correct date, customer information, and invoice number, are included on your invoices.
- Include payment terms - It is important to include clear payment terms so customers know when payments are due.
- Be concise - Keep your invoices short and to the point, ensuring that only relevant information is included.
- Follow up on unpaid invoices - If an invoice remains unpaid after the payment due date, it is essential to follow up promptly to ensure that payments are received.
- Make sure it's going to the right person - Make sure the invoice is being sent to the right person by confirming the full name and contact details of whoever processes invoices for your client.
- Stay organized - Use an invoicing system or spreadsheet tool to help keep track of all your invoices.
For a more comprehensive overview of invoicing best practices, check out Chaser's article on creating an invoice. It covers everything from choosing the right software to setting payment terms and following up with clients.
Establish clear payment terms
Your payment terms are the foundation of your invoicing process. Ensuring the terms are clearly stated on each invoice is essential for successful payments.
One of the most common issues resulting in invoice disputes is a lack of clear payment terms. Confusion over payment dates, discounts, and late fees can lead to serious issues down the line.
Resolving these invoicing disputes takes far longer than taking the time to make sure the payment terms are clearly stated at the start. To avoid potential problems, state your payment terms in an easy-to-understand format on each invoice. See guidance for choosing the right payment terms.
Practical payment terms for law firms
To give you an example of an effective payment term, law firms should include at least the following:
- A specific payment due date within a reasonable time frame - Standard payment terms are usually 30 days from the date of the invoice; however, other arrangements may be agreed upon, depending on your specific circumstances.
- A clear description of the goods or services provided - This helps to ensure that both parties understand what they're being billed for and prevents disputes further down the line.
- Discounts or late fees - This should be clearly stipulated on each invoice if applicable. For example, a 5 percent discount if payment is made within ten days of the invoice date and a 5 percent late fee for any payments received beyond the due date.
- A contact person or department to address any queries - This gives both parties access to someone they can contact with questions regarding the invoice.
- Terms of payment - This is the most critical aspect of any invoice, as it dictates when and how payment should be made. It can include information such as accepted payment methods, due dates for each installment (if applicable), and fees for late payments.
- Any applicable taxes - The exact amount of tax payable should be indicated on the invoice.
- Reference numbers - Including a unique reference number for the invoice makes tracking payments much easier and helps to ensure that invoices are correctly allocated to the right customer.
Making sure your payment terms are clearly defined can help protect your business from late payments and ensure that you reduce invoice disputes, and increase your chances of getting paid on time.
Follow up on overdue payments
Following up on late payments can be a fine line to walk for many law firms. Not following up on late payments can lead to lost revenue, bad debt, and, in the worst-case scenario, insolvency.
However, being too aggressive can damage those all-important customer relationships that are so vital for a successful law firm.
The best approach is to be firm and friendly. Send reminders and ensure your terms are clear, but don't be too pushy or aggressive. Polite persistence is often the most effective approach.
The other issue with consistently following up on late invoices is the administrative burden that puts on your accounts receivable team.
As we mentioned earlier, just following up on late payments costs businesses in the UK alone £684 million a year. Businesses in the US spend, on average, 14 hours per week manually chasing late payments.
An excellent way to undercut the administrative burden of managing accounts receivable is to use an automated payment reminder system. Automated systems can take the pressure off your accounts receivable team by sending out payment reminders and follow-up emails.
Effective credit control automation isn't robotic and impersonal. In fact, each email appears to come directly from you and can be edited to reflect your business and brand. This can help to build trust and loyalty with customers who are late with payments, which in turn will encourage them to pay more quickly.
How to phrase a follow-up email or SMS
The exact phrasing of a polite but persistent follow-up email can be challenging to nail down. You want to be friendly, but you also want to express the importance of payment. To help guide you, view these email reminder templates and SMS payment reminder message templates.
The tone of your reminder should also reflect the lateness of the payment in question. For example, if the payment is one week late, a simple reminder that payment is due may be sufficient. However, if the payment is more than two weeks late, you may want to be more direct and emphasize the importance of prompt payment.
It's essential that your reminder email or SMS does not become threatening or aggressive, as this could damage customer relationships. You can use phrases such as "I hope we can resolve this issue soon" or "We look forward to receiving your payment shortly" to emphasize the importance of prompt payment without being overly aggressive.
How to talk to legal clients about late payments over the phone
If your email and SMS reminders are being consistently ignored, it may be necessary to pick up the phone and call your client. This can be uncomfortable at times, so it's essential that you use a confident yet polite tone when speaking with them. We also recommended having a pre-prepared phone call script when asking for payment with ready-to-use objection handling responses.
When making the call, explain why you are calling from the start. All the required details, including invoice numbers and payment terms, are ready to provide. Let them know the current status regarding their overdue, and politely mention that you need their help resolving this issue promptly.
Be considerate and calm throughout the call. While late payments can be an emotive subject if it’s putting your business’s cash flow at risk, putting your client on the defensive is not the best way to get them to pay. Give your client a chance to explain why they have not paid yet, and make sure you listen carefully. This can help you decide how best to proceed with the conversation.
Finally, negotiate an agreeable payment plan or timeline that works for everyone involved. Make sure this is something both parties are comfortable with. Be sure to thank your customer for their cooperation and explain that you value their business.
With the payment plan in place, reiterate that it is essential they stick to it, as any further delays may have a negative impact on both of you.
Effective collection tactics
To help you successfully collect unpaid invoices, here are a few simple to implement tips:
- Follow up quickly - The sooner you start the process of collecting an invoice, the better your chances of success.
- Remain professional - Always be courteous and respectful when dealing with customers over unpaid invoices.
- Utilize technology - To streamline the process, use an automated accounts receivables tool or payment portal.
- Set terms upfront - Make sure both parties agree to the payment terms before any services are rendered.
- Consider incentives - If needed, offer discounts or other incentives to encourage customers to pay their past-due invoices.
- Stay organized - Keep detailed records of all customer payments, and use reminders or software like Chaser to stay on top of invoice collection tasks.
These simple steps will help you ensure that your clients are more likely to pay their invoices on time and in full.
Offer flexible payment options
We often say that the best way to get paid is to make it easy for your customer to pay you.
While you might have one preferred payment method, it's important to remember that different clients may have different preferences.
You can ensure you're meeting your clients’ needs by offering flexible payment options. Some common methods of payment include:
-
Credit cards
-
Debit Cards
-
Stripe
-
Apple Pay
-
Amex
-
Instant bank transfers
By offering these payment methods, you can make it easier for clients to pay their bills and increase the chance that they will make a prompt payment on their account.
Communicating your payment options with your client
Even the most comprehensive array of payment options isn't going to help if your customer isn’t aware of them.
That's why it's essential to communicate your payment options with your client and clearly state them as part of your payment terms. You'll also want to include them on your invoice if possible, and ideally link out to your payment portal containing all payment options via your payment reminder messages.
Ensuring your customer is aware of their payment options and how to make a payment is essential for encouraging prompt payments.
Offering payment plans and using a payment portal
Two payment facilitators that provide consistent results are offering payment plans and using a payment portal.
Offering payment plans is a great way to ensure your customer can pay late payments in installments rather than all at once. If your client is experiencing financial hardships, then a payment plan might be the best way to ensure they can pay you the full amount, rather than an outstanding invoice being written off as bad debt.
Using a payment portal makes it easier for customers to make payments in a secure and convenient manner.
A Chaser Payment Portal contains all the information needed for a client to pay their invoice, including payment terms, payable amounts, due dates, contact details for queries, and multiple payment options. Payment portals streamline the payment process for your clients, making it easier for them to make payments on time and in full.
Monitor your accounts receivable
The devil is always in the details regarding your accounts receivable. Having a comprehensive grasp of the information in your accounts receivable ledger is essential for maintaining a healthy cash flow.
By tracking your accounts receivable carefully and consistently, you can take proactive steps to ensure timely payment by sending payment reminders, offering incentives for early payments, and implementing late payment fees. Tracking key performance metrics in your accounts receivables consistently (such as days sales outstanding) can help give you better visibility over your performance, and areas for improvement.
The customer payment data produced by monitoring your accounts receivable can also be used to make your internal processes more efficient by helping you identify slow-paying customers that need additional attention and any payment trends that could be damaging your bottom line.
Implement KPIs
One way to ensure that your payment process runs efficiently is to establish Key Performance Indicators (KPIs) for your accounts receivable. KPIs can help you identify trends in customer payment habits and understand the performance of each customer or client against their payment terms.
These metrics can help you forecast and optimize the timing of cash inflows, as well as which customers need extra attention when it comes to payment.
Common KPIs for accounts receivable include:
- Days Sales Outstanding (DSO)
-
Payment Ratios
-
Average Collection Period
-
Accounts Receivable Turnover Ratio
-
Bad Debt Expense Ratio
By tracking and monitoring these KPIs, you can anticipate any cash flow issues in the accounts receivable process.
Maintain positive client relationships
As we mentioned earlier, one of the main difficulties for law firms regarding accounts receivables is maintaining positive client relationships.
While persistence is key, there is also a need to remain courteous and professional to avoid damaging these relationships and ruining the chance of repeat business. To this end, it's crucial to ensure that your staff are well-equipped to handle any client communications regarding late payments.
Excellent communication and transparency are essential to maintain strong client relationships. Making sure your clients are aware of your payment terms and your law firm's policies on late payments is critical.
Additionally, law firms should ensure that the payment terms are detailed in all contracts and invoices so there is no confusion about when payments are due.
Dealing with difficult conversations
When a client does not pay on time, it is essential for law firms to handle the situation in a professional and friendly manner. Establishing effective payment-chasing strategies in advance can help avoid damaging those all-important client relationships.
In cases of non-payment, here are some tips on how to handle the situation:
- Reach out to the client and discuss the situation - The sooner you contact them, the quicker you can agree on a repayment plan.
- Choose the right channel for the situation - Email, SMS, and telephone calls are best applied at different times depending on the situation.
- Be polite and patient - Remember the importance of client relationships. Be firm but polite in your approach.
- Understand their situation - Ask questions, be understanding, and come to a mutually beneficial agreement.
- Always say thank you for payment - Even if the payment has been made late, a thank you message is the perfect opportunity to maintain a good relationship with your customer.
If you're struggling with how to make a difficult call, don't worry, Chaser has some tried and tested phone scripts that you can use or adapt to suit your own business.
Start credit-checking clients
Credit checking is the foundation of sound accounts receivable management. It can help you decide who to offer payment terms to and where credit limits should be set.
While many legal firms credit check their clients during the onboarding process, the best way to approach credit checking is on a continual basis, as people's and business’ financial situations can change over time.
Having access to this data can help shape how you approach payment terms and credit limits for existing clients, as well as potential new ones.
How to perform a credit check
Credit-checking a customer is a straightforward process:
- Check the customer's credit history and background information with a registered credit agency or your accounts receivable tool.
- Assess their financial situation, such as whether they have any outstanding debts or court judgments against them.
- Evaluate their ability to pay based on their current financial standing.
We've gone into more detail on the process in a deep dive into credit checking, but that is the basic structure of a credit check.
As you can see, it's not a complicated process, but it is essential in order to ensure that you are doing business with reliable customers who can meet any financial obligations.
If you're extending credit to another business for legal services, then having access to accurate credit information is essential in order to assess the risk of the transaction properly.
Streamline your accounts receivables process
Constantly needing to chase late payments puts a significant strain on your resources, diverting staff from more productive tasks and costing your organization both time and money.
Employing automation and technology to streamline the accounts receivable process can help relieve this strain significantly, allowing you to focus on core operations while relying on automated software solutions to ensure payment terms are met.
Simply by implementing Chaser, Love Brands saved more than fifteen hours per week in administration time, while Glaze Digital used the time they saved to refocus on customer service and business growth.
Huttie Group collected £15,000 using Chaser that otherwise could have been written off as bad debt, while TaxAssist used Chaser to recover £20,000 of outstanding invoices in just 30 minutes!
These case studies clearly highlight the immense positive impact streamlining via automation can have on businesses of all shapes and sizes, freeing up time and resources to focus on core operations while ensuring that payment terms are met.
How to minimise late payments at your law firm
Law firms are as vulnerable to late payments as any other sector, and the continuing late payment crisis represents a material threat to their long-term growth and even survival.
By implementing the tips above, firms can take meaningful steps toward tackling the late payment crisis while building on their customer relationships and refocusing much-needed talent and resources on areas of their business that generate income and promote growth.
As late payments continue to increase, more law firms are realizing the potential of automation solutions such as Chaser to help them regain control of their cash flow and increase efficiency.
Chaser helps its clients ssave 15+ hours per week on accounts receivables management tasks, and can reduce DSO by 75%!
To learn more about how Chaser can help your law firm reduce late payments, save time, and improve cash flow whilst protecting client relationships, contact us today or start your no-obligation 14-day free trial.
