Law Firm Accounts Receivable Management Best Practices

Law firm accounts receivable management can mean the difference between running a thriving practice and being entangled in expensive disputes and bankruptcy risks.

Recently, a judge ruled that 47 invoices amounting to £3 million from Weightmans’s law firm should be reviewed because a client disputed the billing terms and conditions¹.

Your law firm’s AR management matters even more as recent research shows that clients are pressing law firms to cut charges and lower staff numbers² amid volatile legal spending trends³.

If you handle finances for a UK law firm, this article provides critical insights about law firm accounts receivable management including:

• What law firm accounts receivable management is and how it works
• Why law firm accounts receivable is important?
• Law firm accounts receivable management best practices
• FAQs about law firm accounts receivable management

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What is law firm accounts receivable management and how does it work?

Law firm account receivable management refers to the processes law firms employ to monitor outstanding invoices, collect payments and maintain healthy cash flow. To manage accounts receivable, law firms:

• Verify and approve the customers’s creditworthiness
• Send invoices
• Monitor and track payments
• Manage collections
• Settle disputes
• Process payments

Say you run a law firm in Manchester, England, that’s representing a corporate organisation in a litigation case that spans several months. However, after prompt payment in the first two months. Due to the case's complexity, you go on representing them for six months, when the case is resolved. At this point, they only paid less than half their total bill and have £15,000 left.

Your law firm’s accounts receivable management process can facilitate timely collections through:

• clear communication of the client’s financial obligations
• prompt billing updates and dunning emails from the third month
• regular calls to your client’s point of contact to secure a promise to pay, if possible

Law firm AR management in the UK differs from other industries in that

• The Solicitors Act 1974 regulates how you classify invoices, namely interim statute bills and statutory interim bills.
  • An interim statute bill is the final invoice showing the fees for legal services you've offered after a period. This class of invoices lets you sue for non-payment, permits clients to dispute invoices after one month, and restricts you from revising the bill⁴ ⁵.
  • A statutory interim bill is an invoice you send before your law firm concludes its work on a case. This type of invoicing disallows you from suing for non-payments except if your engagement letter states otherwise and stops your clients from challenging it⁶.
• Clients can still dispute paid invoices for up to 12 months after you send final invoices⁴.
• Many practices offer hourly and task-based billing. Others offer flat rates to be paid over an agreed period.

Why is law firm accounts receivable management important?

Law firm accounts receivable management is important because it:

• is the primary source of revenue: Accounts receivable provides the liquidity you need to pay the staff, handle administrative expenses, and grow the firm.
• reveals the financial health of your practice: Optimal AR management provides accurate data about your law firm’s revenue and overall financial health. This helps you project your practice’s goals and budget realistically.
• reduces risks of invoice disputes and insolvency: Law firm AR management improves collections and cash flow while reducing the administrative and legal costs required to settle invoice disputes.
• improves client relationships: Good AR processes prevent confusion and miscommunication in client relationships. It stipulates financial obligations and helps customers pay on time without feeling cheated.

What are the challenges related to law firms accounts receivable?

UK law firms battle with hitches worsened by the legal framework governing legal billing in the country. Here are some major challenges to law firm accounts receivable:

• Vague invoice classification as interim statute bills or a statutory interim bill: The UK’s law firm billing process adheres to strict and dated billing regulations in the Solicitors Act 1974. Its grey areas have continuously led to disputes about whether a bill is actually ‘a bill’ (statute bill) or a request for payment while working on the case (interim bill).

  For instance, in 2022, a Costs Judge stopped Weightmans from issuing a final invoice after six of 47 invoices were unpaid citing a lack of interim statute bill terms on the invoice notes¹.

  This subjected 47 bills amounting to £3 million to a line-by-line review pending the court’s approval¹.

• Clients doubt the accuracy of law firm billing: Some customers can doubt the accuracy and reliability of hourly billing leading to disputes and delayed payments. They need proof that you focus on billable tasks like preparing court filings, providing case updates, or sending emails within the billed hours.

• Damages Based Agreement case challenges: Clients of Damages Based Agreement (DBA) cases may be facing financial challenges and unable to reimburse costs like court fees if they don’t win the case. This leads to delayed collections.

• Delays and disputes from VAT on legal services in the UK: Inaccurate or inconsistent VAT records can lead to His Majesty’s Revenue and Customs (HRMC) fines. If your law firm can’t recover VAT from previous clients, paying fines will reduce profitability and cashflow.

• Time-based billing inaccuracies: Solicitors struggle to identify billable hours and tend to let earned revenue slip by to avoid disputes.

Law firm accounts receivable management best practices

Adopting the following best practices for managing accounts receivable will improve cash flow, ensure faster collections and an optimal client experience.

Understand and comply with the requirements of the Solicitors Regulation Authority and the Solicitors Act 1947

To minimise disputes, lawsuits and reputation damage, train your staff to be compliant with the legal frameworks governing law firm billing in the UK.

For instance, to comply with the SRA, your practice should reconcile client accounts every five weeks⁷. Your law firm also must send a bill of costs and give written notice of the costs incurred before transferring funds from clients’ accounts to your business account⁷.

Set clear billing terms and conditions

To clearly communicate the terms and conditions for payments:

• Use a letter of engagement to set out payment conditions and clarify grey areas in your agreement.

• Specify whether invoices are final invoices or interim bills. For example, Weightman would have avoided the 3 million invoice disputes if they had stated that, though they received a retainer fee, the law firm reserved the right to a complete and final invoice¹.

  The Costs judge explained that “...it would not have been “onerous” for each invoice to bear the words, ‘This is an interim statute bill’...¹” So add payment terms to your invoice.

• Avoid using legal jargon as this could be deemed as an attempt to obscure information from your client.

  “Section 11 of the terms and conditions was headed ‘Billing arrangements and payments on account’ and the judge noted that there was no distinction drawn between the two.

  It talked about issuing a ‘statutory interim bill’. While a lay client was “not necessarily expected to understand the correct legal terminology. A solicitor is”, the judge stressed.¹”

• Mention the flat fee and the stages of payment where this applies

• Share all payment methods

Bill daily

Bill daily to ensure accurate and up-to-date financial records. If you bill after a week or month of work, it might lead to billable time underestimation, vague or inaccurate task descriptions and revenue losses.

To make daily billing easier, use keywords, phrases or codes you'll remember to note the exact details of billable work you’ve done to help you remember when you write a detailed billing task description.

Charge in six-minute increments, billing .1 of an hour to calculate your total billable time. Avoid rounding it up to whole numbers, as this can spark doubts in your clients.

Avoid billing non-case-related activities like internal meetings and general administrative work.

Describe billed tasks using verbs and showing benefits

Describe tasks in hourly billing using action words and stating how the tasks benefit the customer or achieve the goal of winning the case.

For example, instead of writing “court filing” write “prepared a statement of claim listing allegations against the defendant to notify the defendant.”

Understand clients’s billing requirements

Confirm the billing requirements of your clients. For example, some clients have restrictions over what you can bill for travel and what you can’t. Others may not permit billing several tasks over a chunk of time. They may want you to specify how long it took to complete tasks.

Streamline AR workflows with law firm billing software

Use law firm billing software like Clio, TreviPay and Payt to automate payment and directly record billable tasks done over time. This reduces the risks of human errors caused by transferring information from one system to another.

With these software tools, you can also send invoices promptly and set up automated dunning messages.

Law firm billing software tools are also cost-effective as their costs scale up or down to match your uses.

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FAQs - law firm accounts receivable management

Here are some commonly asked questions answered:

What is accounts receivable management?

Law firm accounts receivable management is the process a practice undergoes to track and recover revenue locked up in unpaid invoices.

What are the law firm accounts receivable best practices for reducing overdue invoices

To reduce overdue invoices in your practice:

• Set clear billing conditions in engagement letters
• Agree on retainers or staged payments to improve liquidity
• Offer different payment options like direct debits, cheques, card payments, and online transfers.
• Automated payment reminders

What is a healthy collection period for law firms?

A healthy collection period for accounts receivable in a law firm is 30-60 days.

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Sources used:

1. https://www.legalfutures.co.uk/latest-news/firms-3m-of-invoices-face-assessment-after-losing-statute-bill-fight
2. https://www.thomsonreuters.com/en-us/posts/wp-content/uploads/sites/20/2024/04/State-of-UK-Legal-Market-2024.pdf
3. https://www.fnlondon.com/articles/law-firms-face-push-to-cut-fees-and-staff-amid-slowdown-as-clients-move-to-cheaper-competitors-20221019
4. https://www.legislation.gov.uk/ukpga/1974/47/section/70
5. https://www.legislation.gov.uk/ukpga/1974/47/section/69
6. https://www.legislation.gov.uk/ukpga/1974/47/section/65
7. https://www.sra.org.uk/solicitors/standards-regulations/accounts-rules/

Sources last checked on 14th February 2025