Liquidity is essential to the survival of businesses – and law firms are no exception.
This particular industry suffers from high lockup periods. Across the legal sector, year-end lockup increased again in the last year, to an average of 137 days (from 125). The number of days taken to collect debts increased from 58 days to 65 days, and the average time taken to bill WIP also increased from 67 days to 72 days.
Reducing lockup will always be one of the most significant ways for law firms to free up cash. Even by a marginal amount, reducing lockup can have an immediate and positive impact on firms’ cash positions. Not only does cutting down lockup days free up cash now, but instilling better financial practices means that firms will be more prepared for the economic uncertainty we’re currently experiencing.
How to reduce lockup and improve cash flow
Billable activity and profit need to be converted into cash quickly during these uncertain market conditions. Reducing lockup requires a combination of a change of culture and investment in the right technology.
Here’s how law firms can start reducing their lockup periods:
1. Understand your data and set targets
The first step to improving lockup is to understand your own data, set clear targets and monitor performance. The goal can be simple, for example: the time it takes clients to pay invoices after issuing them.
With Legl, intuitive analytics give you valuable insights such as how long it takes to onboard clients and how quickly they pay – get a picture of your clients in minutes to drive smart business decisions.
2. Change business practices
While there are some quick wins to be had using technology, ultimately to reduce lockup you need to change firm culture. Your action plan may include the following:
- Develop a new culture around time recording to shift to an ethos of focusing on profit, revenue, and payment collections to maximise billable hours.
- Improve client communication. Ensure you are keeping them updated regularly on WIP vs your quote.
Moving away from billing at month-end to billing across the month can result in clients paying a full month earlier. A client who is happy with the outcome of a case may well pay more quickly if they receive the bill promptly.
3. Use technology
There are now a growing number of technology tools which can help you reduce your lockup period. These range from lawyer-facing technology like billing software and time recording, to client-facing technology, like online payment tools.
Legl found that 50% of clients pay their invoice outside of office hours, and that when firms include a link to pay online with their email invoices, clients paid on average within 3 hours. Offering clients the option to pay online means firms got paid faster, while giving their clients a more frictionless and modern payments experience.
An efficient culture of creating documents such as client care agreements (including e-signatures for rapid onboarding), and ensuring that the terms indicate clearly that the client will be regularly billed for work in progress is pivotal in digital transformation.
Adopting a practice of making sure that lawyers are taking money on account (especially for new clients), and that invoices are sent swiftly through an effective legal tech solution will go a long way to reducing your firm’s lockup period.
4. Offer flexible payment options
If clients are suffering financially, offering a payment schedule can ensure you at least recover some of your outstanding monies.
As well as providing clients with relief that the matter can be resolved, when these clients return to a stronger financial position, you will have earned some customer loyalty that might lead to future business.
Time to reduce lockup
Now is the time to reappraise firm-wide culture surrounding lockup. Small adjustments in practices can have a big impact on firms’ overall cash positions.
By exploring a solution like Legl, you can provide quick and slick payment options for clients to avoid unnecessary delays in bill payments (on average, Legl customers’ clients pay in less than 12 hours).
There’s a huge opportunity cost of not having clients’ bill payments in your account sooner – discover how to realise that cash and reduce your firm’s lockup period for good.