Law firm cash flow: managing client payment delays effectively

The average lockup period for law firms has increased from an average of 143 days to 146. While waiting longer for incoming client payments, law firms’ cash flow can become volatile, particularly during seasonal periods where large tax and insurance renewal payments are due.

What steps can law firms take in order to not only keep cash flow healthy, but reduce the risk of strain on client relationships?

Common causes of law firm cash flow issues

Delayed client payments are becoming more commonplace for law firms, but why?

External factors

External influences, such as economic downturns, can lead clients to have their own cash flow problems, resulting in delays in paying their firm on time.

Law firm cash flow can also be put under pressure during seasonal periods when large tax and insurance renewal deadlines are due. If combined with a delayed or missed client payment, this can put increased pressure on firms when it comes to meeting payment obligations. 

Internal factors

But there may also be internal factors within a law firm that are contributing to client payment delays.

Inefficient, inconsistent billing systems within a firm can lead to challenges when it comes to client payments and any manual errors may delay payments further.

If a law firm also doesn’t have a consistent payment follow up plan in place, or lacks the resources to enforce late payment policies, they may find themselves struggling with payment collections on multiple client cases.

The impact on law firm cash flow

If a law firm’s cash flow management is poor, the knock on effects can be significant.

Not only does it become increasingly challenging to accurately forecast revenue, but even daily operations can feel disrupted if there is less working capital available.

As law firms prepare for renewals and tax deadlines, without client payments, they may find they have to dip into their cash reserves to cover the costs and meet their own payment obligations.

If cash flow is poor, law firms will struggle to grow and scale in the long-term, which could put a strain on their relationships with clients and future prospects. In a worst case scenario, it could threaten the stability of the firm.

How to mitigate the impact on law firm cash flow

Although delays in client payments are sometimes unavoidable, law firms can proactively put a number of strategies in place to minimise the impact on cash flow.

Improve billing practices with automation

Improving billing practices internally can help streamline payment processes with clients.

Employing more automation, like Open Banking and generated follow ups, can help improve workflows within a firm, even when resources are low. Not only can invoices be sent out via online portals faster and more consistently, but follow ups are also conducted in a more regular manner, freeing up valuable time for staff.

With faster payments, law firms can ensure their cash reserves remain healthy during busier periods.

Offer flexible payment plans

Providing more flexible payment options for clients, such as credit card or direct debit payments, or installment plans, can help to ease the pressure of paying a lump sum at the end of each case, while still assuring that a law firm will receive payment on time. 

Align on payment terms early

Having clearly defined payment terms agreed early on, that outline due dates and potential late fees, will help make it clearer for clients when payments are expected.

Law firms should make sure that expectations are mapped out clearly from the beginning, so both parties are aligned. In doing so, this will help foster a stronger client relationship early on and encourage faster payments each time.

Spread the cost with funding

To ease the pressure on cash flow, external finance solutions can be used to help spread the cost of important tax payments, like VAT and insurance renewals.

By spreading the cost over the period of liability, law firms aren’t having to dip into their cash reserves, which safeguards vital working capital and ensures operations can still run smoothly.

Conclusion

Delayed client payments can often be inevitable. However, by putting proactive strategies in place, law firms can ensure their cash flow remains strong, even during times of unpredictability – enabling more time to be spent on business growth and profitability, and less time chasing payments.