Reinventing Finance Solutions to Overcome Year-End Collection Challenges

This special guest post is by Evan Hutcheson, CPA, LLC

For many lawyers, collecting outstanding fees at the end of the year is an annual rite of passage. The process usually starts in December, and attorneys all around are familiar with the struggle of getting their finances in order before the clock strikes 12 on New Year’s Eve.

The year-end process doesn’t have to end in a mad scurry to make sense of finances once the holiday season comes around, however. With some savvy planning, law firms can clean up their end-of-the-year financials and close their law firm’s fiscal year smoothly. That’s why it helps for law firms to keep accounting conversations open and turn to reliable tax preparation service providers.

Before solving the problem, however, it helps to understand why the problem exists in the first place. Why does outstanding fees collection create a storm at the end of the year? On top of that, how can law firms avoid external and internal pressures before the year ends?

Crunch Time before New Year’s Eve

December is a crucial time for law firms as they play catch-up with persistent, financial-related challenges. These include the following:

Delayed payments. For law firms that charge clients by the hour, there can be significant cash flow delays. Hourly clients can, after all, be slow to come up with payments. Consequently, law firms face the problem of falling behind on collected fees. While some may employ a heavy-handed approach to receive due compensation, valuable customers can react negatively to being pressured to pay on time. This could lead them to seek legal services elsewhere.

Contingent-fee matters — the kind where law offices only receive payments after the successful resolution of a case — are another issue. Even after the case has ended, firms may only receive payments after its resolution. This is a process that could take several months or even years. In some cases, for instance, a firm may have to wait for the settlement to earn court approval. Along with the slow pace of the administrative process, cash flow delays may drag on longer than expected.

Revenue recognition. Failing to collect fees can have a profound impact on revenue recognition. The lack of up-to-date financial records can paint an inaccurate picture of a firm’s success. But as long as there are outstanding profits, a law office will suffer from lower profits, revenue-based rankings, and overall morale. Furthermore, with less-than-impressive annual results, law offices fall short of enjoying the significant victories won for clients.

Damaged client relationships. Law firms are trusted counselors; clients turn to them for guidance on legal matters. So, when crunch time before New Year’s Eve kicks in, clients may respond poorly to the sudden push to collect fees. By turning into a glorified bill-collector in a bid to negotiate for timely payments, firms risk upsetting the dynamic between themselves and their clients.

Organizing the Year-End Collection Cycle

Getting a better handle on the year-end financial process boils down to proper preparation and planning executed throughout the entire year. For instance, it helps for law firms to submit invoices to clients early so they can secure the payment before the deadline. Organizing the year-end collection cycle involves doing more than that, however. In fact, the trick to a hassle-free year-end is anticipating the expenses before their due date.

On that note, law offices can take the following steps to close the books on the previous year and get off on the right foot come New Year’s:

  • Work-in-progress report reviews – Examining work-in-progress reports can help single out pressing issues or whether there are some reports that a firm should bill or write off. That way, firms can eliminate unexpected charges to their legal bills.
  • Advanced billing – Customers often take time off during the holidays. This could result in payments being sent at a later date. Firms should make it a point to bill clients before the holiday season rolls around to avoid this situation. They can do the same thing when preparing ahead for lengthy trials in the coming year.
  • Send timely bills – Sometimes, customers need a gentle nudge when it comes to payment deadlines. In fact, clients will appreciate the constant payment reminders, instead of suddenly getting word that their bills have gotten out of hand. By sending bills regularly, law firms can manage their accounting process and ensure there are no outstanding payments on the table.
  • Automate the process – Manual billing can be cumbersome. Standardizing the process and eliminating errors are a lot easier with an automated system. Apart from taking the inconvenience out of the collection process, it cuts off billing delays because automation allows for automatic billing right after clients purchase legal services.
  • Address unpaid invoices – Before the fiscal year closes, it pays for law firms to pro-actively engage with clients regarding unpaid invoices. From there, it’s easier to decide whether the pending invoices require immediate payment or if law firms should write them off instead.
  • Establish delinquency policies – Even with a well-thought-out billing system, some clients may fail to pay for legal services on time. The solution is simple: law offices should establish a delinquency policy — a general rule stating the consequences clients face for failing to make their payments on time. By implementing it fairly and consistently, there is a lower chance for law firms facing finance-related troubles down the road.
  • In-depth accounting reviews – While having an accountant is useful, law firms have their part to play in the accounting process, as well. They should, in fact, ask accountants to conduct comprehensive quarterly reviews so that finances stay organized throughout the year. Making adjustments four times a year makes it easier to solve errors and ward off end-of-the-year headaches.

The fact is that dealing with collections is an inevitable part of being in business regardless of the industry you are in. If companies want to make the most of the billing process and their money, they need to check whether their records require need some additional care.

While December may seem like the ideal month to close in on outstanding receivables and fix the budget for the upcoming year, pulling off successful year-end financials lies in making the right preparations throughout the year. That way, businesses can enjoy a hassle-free accounting process for a more fruitful year ahead.


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