(Reprinted with permission of Ardmore Publishing Company)

Calculate the cost of the firm’s unbilled, unpaid hours

THE PRICE GOES UP EVERY DAY

The one chapter about financial management that most firms never read is the chapter on how much an unbilled and unpaid hour actually costs -—day by day by day.

Every day an attorney hour goes unpaid, the less profitable that work becomes.  In fact, profitability starts declining the minute a billable hour is complet­ed. because the older the account, the less collectable it is.

There’s also the damage to the cash flow.  That unpaid bill may eventually mean the firm can’t pay its overhead.

Take a hard look at the cost of those hours, says ROBERT HENDERSON of RJH Consulting, a legal practice management firm in Jackson Hole, WY.  Put into dollars, it’s enough to make any firm set up and enforce a rigid system of timekeeping, billing, and collections.

TURNING THE HOURS INTO CASH

Look at how long it takes the firm to convert its work into cash, Henderson says.  Figure that with a two-part calculation.

First is the time it takes the firm to turn its hours into hills.

To get that number, divide the average unbilled bal­ance by the average monthly billing for the year to date.

For example, suppose the firm carries an average of $1 million in unbilled time.  And suppose the average monthly billings come to $250,000.  That means it takes an average of four months to convert its attorney time into bills.

The second part of the calculation is the time it takes to turn those bills into cash.

To get that, divide the income for the year to date by the number of days.

Suppose it’s the end of October and the receipts in hand are $2.5 million.  Divide $2.5 million by 365 days. The firm is bringing in an average of $8,333.33 a day.

Now divide that average daily income into the amount the firm is carrying, or the $1,000,000. That’s the number of days it’s taking to collect on the bills -—in this case, 120 days.

Add those two times together.  It’s taking four months to turn the hours into bills and another three months to turn the bills into dollars.

The firm is waiting seven months to get paid.

30 DAYS TO BILL, 30 DAYS TO PAY

     The goal, Henderson says, should be two months, which means work done today should get billed in no more than 30 days, and the money should come in no more than 30 days after that.

“That’s the most a firm can hope for,” he says, and while it may not be possible to reach that level, any improvement on the timeline will help.

If the firm is now taking seven months to get a dollar in its pocket, and it shortens that by just one month, “it’s dramatically increased both cash flow and profitability.”

A cut on either end is worth the effort.

On the hours-to-bill segment it’s worth it because any client is more apt to pay the hill while the services are still ongoing or at least fresh in memory.

On the bill-to-collection segment it’s worth it because the value of a billed hour drops as each day passes.  After 30 days, the expected collection rate is 97%; after 60 days, it’s 90%: at four months it’s 73% and it goes down even more quickly after that.

A BETTER KIND OF ENGAGEMENT LETTER

Any firm that has a large balance of unpaid fees needs to look at both its management and its opera­tions, Henderson says.

The solution is no secret.  It starts with the usual engagement letter.  But go further with that letter than most firms do.

Spell out the rates. When the client will he billed, and when the firm expects payment and then put in a provision that the client has to pay within 30 days of receiving the hill.

There’s nothing unreasonable about that, he says.  The firm has its own hills to pay, and just about all businesses expect to be paid within 30 days.  “Medical offices even expect payment at the time of service.”

For nonlitigation matters, it’s often possible to go even further and put in an or-else provision-that if payments aren’t made on time, the firm reserves the right to discontinue service or withdraw from the matter.

Then go beyond even that and tell the client that the work won’t start on the matter until after the letter is signed.

A FASTER TIME ENTRY REQUIREMENT

Along with the engagement letter is the usual dead­line for getting the time in.

But again, go further than most firms do and make it a rule that the billers have to submit their hours every day.

Like the stronger engagement letter. the daily dead­line is not unreasonable, because the tenet of time is that “the longer it takes to enter it, the more the firm loses.”

The only sure way to capture every billable hour, he says, is to input it as soon as the work is completed.  End of the day is acceptable, but still only second best.

And beyond one day, “the firm is automatically going to lose time.”

A SURER COLLECTION CALL

For collections too, go beyond the norm.

Make a preemptive strike as soon as the 30-day mark passes. Call and ask the three magic questions: Did you get the bill?  Do you have any questions about it?  When can we expect payment?

Henderson also emphasizes that the billing attorney should never be the one responsible for making the collection calls.  Assign that job to the attorney, and count on it that it won’t get done, he says, because attorneys don’t want to jeopardize their client relation­ships.

Assign the money talk to the billing department or the administrator.  Besides the fact that the calls get made, any client is more likely to bring up a problem with the legal services or the bill to someone other than the attorney.