Automate the Billing Process

Billing is one of the worst looked after internal areas for professional businesses. Through neglection, most cash flow systems are designed for the benefit of the client, not for the benefit of the business.

Furthermore, billing practices are left to technical employees who only want to perform technical work and not administrative work, further delaying the billing process.

You set the rules of engagement, so why not design them around reducing the time between engagement and time to collect cash for work performed?

Most Billing Processes

Your billing cycle will, more or less, follow the process below:

  • Client work come in;
  • Client engagement letter (hopefully) sent;
  • Work started;
  • Interim fees end of first month;
  • Client queries sent out;
  • Waiting, waiting, waiting;
  • Client queries returned;
  • More client work;
  • More client queries;
  • Waiting, waiting, waiting;
  • Work finished, reviewed and sent to client (or maybe a client meeting to deliver);
  • Bill completed at the end of the month;
  • Waiting, waiting, waiting;
  • Cash arrives

For those businesses who provide transactional types of work, the two monthly turnaround time can be reduced to one month. Even in this scenario, the date from commencing the work to collecting payment can be over 100 days. Below is a simple example explain this.

Automate the Billing Process img

Benefits of Automation

There are many benefits from automating the billing process. The first benefit is an immediate cost savings in both time and resources spent. This leads into a simplified collection process, with invoices raised in a timely manner from monies in trust or via direct debit arrangements. Below is the same 100-day example with automation.

Automate the Billing Process

Indirectly, you will form better customer relationships for being upfront about the process and expectations. Automation can also be developed out of your core business technologies providing better information on your customers.

Where to Start?

If you want to get a different cash result, you need to change the way you engage clients. Therefore, start by reviewing your engagements and cost agreements.

Fix your current agreements and engage clients around making billing an automatic admin function of the business in these engagements i.e. Initial fee billed when cost agreement is signed.

Implement reviews. These should be weekly and focusing on WIP that can be withdrawn or billed. Reviews don’t stop with billables, follow up debtors weekly instead of monthly

Remember to only focus on what you can control: the terms of doing business around billing and collections.

Client Engagement

It costs so much less to keep a client than it does to find a client. If you’re wanting to improve the cash flow of your business, one of the first places to start is with your existing client engagement. Client engagement is linked to both revenue and costs, and therefore significantly impacts cash flow.

A strong client engagement process makes sure your clients play by your rules. It addresses your fees, therefore your profit, as well as the want to buy again, therefore your revenue. and your cash flow. Include a plain language covering letter with your costs agreement outlining the work, the fee amount, your billing cycle, your trust account policy (if one) and your payment terms. Then follow the rules that your client has signed up for.

Client Relationship Management

The sole function of client relationship management (CRM) is top manage the relationships so that clients come back to buy your services again and again. Clients and prospective clients have multiple touch points with the practice during the revenue cycle. Identifying these touch points will identify cost inefficiencies and leverage opportunities. Have the conversation about fees right at the beginning and it will sort out your profitability and cash flow, so long as you then bill it.

The new work generally comes from your network, and this is usually tied to existing clients either coming back or referring someone to you, or from your referral network. What this means is that clients and prospective clients have already made up their mind that they are going to buy from you. They have made that decision based on what you have already done for them or based on what they have been told about you.

Terms and Conditions

Most firms have some sort of engagement processes, but what they do next is critical. Your clients have signed up for your services. They have signed a costs agreement, or have received a shorter form of engagement letter, depending on the matter size. Regardless, they have agreed to your terms & conditions. Yes, that’s right, your terms & conditions.

The terms and conditions that some of you heavily rely on during debt collection proceedings for your clients apply just as much to how you engage with your clients during the service.

Practice what you preach. Follow your own rules. Bill when you say you are going to, money into trust or upfront and top ups along the way, apply the rate you say (no WIP write-offs). If it’s good enough for you to tell your clients to do it, make sure you do it yourselves.

How to Improve Cash Flow

Lock-up is the KPI measurement between when an engagement or costs agreement is signed and when you ultimately receive all the cash for the work you have done. When you engage your clients properly, lock-up is reduced as your client understands the basis upon which you will help them, and that includes how you expect to be paid.

Good client engagement will ensure the client is clear on how much they will be billed, when they will be billed, and when they are expected to pay. If you’re building a house and you don’t pay the builder, they stop work. If you buy some new shoes, you have to pay for them before you leave the shop.

Your practice is a business. It must follow its rules around cash, which means your clients must follow the rules.

Collection Processes

Collecting cash shouldn’t be an issue if you integrate automation with the billing process as you will only need to deal with the minority of cases. For most professional businesses, the automation process is a work in progress, or they haven’t thought about how to collect from those troublesome clients. For these businesses, how you collect payment is critical to survival.

Collection Techniques

Communicating the businesses credit terms and expectations clearly and as early as possibly will ensure there is no confusion and sets engagement expectations upfront. Likewise, quantifying fee expectations in advance and communicating variations as they’re known will avoid confrontation upon billing.

Change your clients and employee’s perception of overdue. Instead of your traditional 30, 90 and 120+ day methodology, change this to a “Due Now” and “Overdue”. This simple perception change alone will bring significate uplift in collections and will also identify those trouble collections early on before they turn bad. Where possible, automate/systematically follow up on debts and communicate this at the start or include in the engagement.

In summary, the faster you bill and communicate, the easier it is to collect an aging WIP and Debtor amount owed. Don’t forget to be professional when collecting debts, non-confrontational reminders will get the best results for the majority while maintaining reputation i.e. the friendly reminder.

Collection Policy

Good collection policies will include a number of considerations. You need to develop a clear collection policy to get the desired results and state this in your engagement letter or cost agreement. For those who don’t know where to start, at the very least they should include:

  • A grace period;
  • Penalties (if any) post this grace period;
  • When collection reminder notices are sent and how;
  • When to send and when to call;
  • Expected actions that will be taken and when;
  • When are accounts placed with outside collection firms; and
  • When you will write off the account as a bad debt.

Other considerations

You, as a businesses owner, need to be all in. What I mean by this is consistency as well as a commitment to the process. Consider when sending invoices and when best to fit within the clients best timing and only discount where risks are higher.

Consider who is the person responsible for the work and if their the best fit for invoice responsibility. Set KPIs around lockup and collections to drive the desired result.

For those professionals who don’t want to follow suit, the KPIs should be linked to the sometimes-forgotten relationship. Accounts pay wages and bonuses, if you don’t bill and collect then the individual and team will be penalised in some way.

If you have found this article useful and would like to know more, reach out to FWO today.

Two Numbers

It is easy to get lost in the numbers, especially when you don’t know where to look. Most of the time it’s a combination of knowing what data to gather and collecting said data in its complete form.

Having analysed numbers for thousands of professional businesses, there are two high level KPIs that you need to focus on to drive performance within your business. These are Average Rate & Lock-up Percentage.

Continually focusing on these two numbers gives you the framework to drive improvement in profit and cash flow. Average Rate directly correlates to driving the profitability while Lock-up Percentage focuses on improving cash flow.

Average Rate

Average Rate is the calculation of revenue received over professional employee labour paid. This KPI tracks performance of individuals, teams, departments and the business as a whole.

At a very high level, this KPI tracks performance by incorporating productivity, write-offs and recoverability over direct labour costs. As this number increases, so does businesses profitability (margin).

Average Rate = Revenue / Paid hours of direct labour

Lock-up Percentage

Lock-up is a term that refers to revenue that hasn’t been billed or collected. Lock-up is a combination of unbilled revenue (WIP) and revenue that has been billed but not yet collected (debtors).

Lock-up Percentage is the rate once Lock-up is divided by annual revenue. This KPI is very important for cash flow. By tracking how many days revenue sits idle and its comparison to revenue as a whole, we can understand how we can release cash.

If you’re struggling to identify which KPIs are important for your business, more importantly if collecting said data in its complete form is also an issue, start tracking Average Rate & Lock-up Percentage. These two key KPIs will set your professional business on the right track.


What you can Measure you can Manage

Numbers don’t lie. But they can tell you the wrong story if you don’t read them correctly.

A law firm has 5 key financial numbers that it needs to measure at least weekly:

  1. Productivity %: the percentage of total hours charged by fee earners to WIP of the hours they are at work
  2. Write-on/off %: the percentage of WIP billed either over or under the amount charged to WIP
  3. Average rate: the average amount of revenue earned per hour paid
  4. WIP days: the number of days of revenue that has been charged to WIP but unbilled
  5. Debtors days: the number of days of revenue that have been billed but hasn’t been paid by clients

There are many more financial numbers that should be measured to provide a complete financial story for the performance of a legal firm.  Here I’m only focussing on the five key measures that drive improvement in revenue and cash flow on a daily basis.  To improve the financial performance of a law firm, you must first get these right, then the other key numbers will take care of themselves.

These numbers are called key performance indicators (KPI’s).  KPI’s are more than just information.  These KPI’s measure the key revenue and cash flow activities of a law firm.   Albert Einstein defined insanity as doing the same thing over and over and expecting a different result.  So it makes sense that unless you do something different with the activities that drive these KPI’s, you won’t get a different result.

Some key activities that will drive improvement in these KPI’s are:

Productivity %

  • Set clear daily and weekly hours and $ based targets for each team member
  • Have each team member report on their $’s added to WIP (self monitoring)
  • Focus on marketing and sales activities to drive work for team members
  • Closely monitor work flow to ensure each team member is working to their capacity
  • Focus on file velocity (i.e. completion of matters)

Write-on/off %

  • Engage all clients by providing an estimate of the work you will do for them and have clients sign off on this before you start work
  • Plain English covering letter stating terms of engagement attached to costs agreement
  • Re-engage clients during the matter when WIP is likely to materially exceed the estimate
  • Bill the amount in WIP
  • Ensure the right person is doing the right work at the right rate

Average rate

  • Value the solution you provide to your client and bill them accordingly
  • Increase your charge rates
  • Set a minimum average rate per hour for the entire firm and bill to achieve this rate
  • Provide high end high value solutions to clients with your products/service offerings
  • Implement a marketing strategy that creates awareness around the value to the client of the products/service offering to them
  • Always remind the client of the value of the solution you provide to them
  • Constantly cross-sell & up-sell
  • Define your core product/service offerings and set minimum prices for them firm-wide

WIP days

  • Engage all clients by ALWAYS providing an estimate of the work you will do for them and have clients sign off on this before you start work
  • Plain English covering letter stating terms of engagement attached to costs agreement which includes the timing of your billing
  • Bill clients early and often
  • Given that billing is aligned to the agreed timing and estimate per the engagement process, billing is to become an administration function, not required to be done by the fee earners until the final fee is prepared

Debtors days

  • Take debtor follow up away from fee earners
  • Debtors collection to be the responsibility of a debtors champion (non-fee earner)
  • Define the debtor collection process
  • Deposit cash directly to trust account and review WIP every week (as a minimum) to withdraw cash to the general account

Measure the outcomes of the right activities to get a different result.