Law Firm Billing: Ultimate Guide and Best Practices

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vector illustration of a bill

Billing is critical to the success of your law firm. And yet, for many law firms, billing clients and chasing down payments can still be one of the most time-consuming, repetitive, and dreaded parts of the job.

According to the 2019 Legal Trends Report, lawyers record only 2.5 billable hours per day on average, with the rest of their day going towards a variety of tasks including preparing and sending invoices, processing payments, and updating trust ledgers.

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The law firm billing process

In many cases, the billing process looks something like this:

  1. The firm brings on a new client and opens its case
  2. Billable time and disbursement fees/expenses are logged throughout the case
  3. At the end of each month (or at the end of the case, if it’s a shorter case), bills and expenses for each client and case are put into a draft bill
  4. Attorneys add notes and adjust costs as needed and approve the bill
  5. A final version of the bill is created and sent to clients for payment
  6. Clients pay via whatever payment methods are accepted at the firm
  7. Accounting team sends follow-up reminders regarding late payments

While it seems fairly straightforward, there’s plenty of room for bottlenecks and wasted costs. For example, attorneys taking too long to approve bills or adding too many edits can cause a delay in bills getting sent out. 

Your law firm’s billing policy

To save your law firm valuable time and money, having a clear, standardized law firm billing policy in place is essential. It gives lawyers and staff something to refer to and keeps everyone in sync.

If you’re writing a policy for the first time, you’ll want to consider:

  • How does your firm bill clients? 
  • Where are you seeing the most errors?
  • Which stages of the process are causing the biggest bottlenecks? 

With that in mind, follow these steps to write an effective billing policy:

1. Provide a template and guidelines 

These should include when to send invoices, how long descriptions should be, what types of expenses must be included on bills and what should be written off, and any standard introductory communications on bills, if needed.

2. Write out the flow of your law firm’s billing process

Which attorneys on a case need to review a bill? In which order? Are bills mailed or sent electronically? Who needs to be informed when a bill is sent out? Write out your whole process from start to finish so there’s no confusion.

3. Set requirements for invoice review

It’s helpful to ask lawyers to use a specific system, such as your legal practice management software, to conduct reviews electronically. This helps speed up the process and leaves less room for error; you can even use automation software.

4. Integrate the finance team with your billing process

Make sure your accountant or finance team knows when bills are being sent, what still needs to be collected on, and what’s being written off.

5. Include a standard process for disputes and collections

Don’t leave unpaid bills languishing for months. The longer you wait, the less likely it is your clients will pay, so have a clear collections process. Layout who needs to follow up unpaid bills and when. Have a standard letter or email to send asking for payment.

If a client disputes a bill, know who will review the dispute and provide frameworks for resolving the issue.

6. Have a public billing policy for clients

Your clients should be clear on your billing policy, so they’re clear on:

  • How often they’ll be billed
  • When bills will arrive
  • What type of payment is expected
  • How soon they need to pay
  • The consequences for late payments 

Write this out clearly and make it available to all new clients.

Invoice requirements

If you’re working with a larger company, there may be strict invoice requirements regarding everything from when bills must be sent to how bills must be formatted. However, even if you’re not working with big businesses, you should still stick to a standard set of invoice requirements. This will ensure consistency for your clients‚and keep the billing process running smoothly.

Billing descriptions

Legal firm billing descriptions should neither be too long or too short. They should provide the right amount of context and information to leave the client satisfied that they’ve received the value they’re paying for. Clear billing descriptions lead to fewer disputes later on in a case.

Billing time descriptions could look like:

  • “Met with client to review wills and answer questions”
  • “Legal research to strengthen arguments for next month’s hearing”
  • “Spoke about and recorded the facts of the case with the client”

Law firm billing codes

Separate from descriptions, billing codes lay out—at a high level—which activities or expenses a client is being billed for. 

Example codes might look like:

  • Meeting
  • Draft/revisions
  • Research

These codes should, at the very least, be consistent within your firm. Another way of doing this is to use standard billing codes as outlined below.

LEDES billing

If your law firm works with larger clients, your billing process may include an extra step: Formatting your bills to use LEDES billing codes for time and expense entries. 

LEDES, or Legal Electronic Data Exchange Standard, is a standard format for electronic legal billing that uses specific format guidelines. It makes it easier for large organizations to handle large amounts of files and data, and assess invoices, as all they will all be coded in the same format.

Likely, unless your client specifically asks for it, you won’t need to provide LEDES-formatted bills. However, it’s worth checking if you’re working with a business or larger client.

You can also use UTBMS codes (Uniform Task-Based Management System Codes) to give further detail on a LEDES bill.

Creating A billing template

If you’re not sure where to start with standard invoice requirements, there are plenty of billing templates available. Software suites like Freshbooks provide an excellent law firm billing template. You can also create customized bill templates by using bill themes in Clio.

Top tips to improve billing productivity

conveyor belt

1. Set expectations with clients up-front about your firm’s billing process and policies

Good billing comes down to clear communication with clients. A bill isn’t just an invoice: It’s a tool for communicating the value you provide to your legal clients. 

Depending on your practice area, hiring a lawyer may be one of the most expensive things your client ever does. Spare them from unexpected bills: Set clear expectations as to what clients can expect to see on invoices, when they’ll receive them, and how they’ll be able to pay.

2. Track your time as you work for more accurate billing

If you’ve ever sat down at the end of a workday and tried to remember exactly where your time went, you know just how difficult it is to get everything recorded on a bill. Use a timekeeper to track your time as you work, and take notes to ensure the client is crystal clear on the value you’ve provided. This is the best way to ensure nothing gets missed, and that every time entry is accurate.

3. Use clear descriptions

Your invoices to clients should be easy to understand, but that doesn’t mean they should lack detail. Clearly articulate everything you’ve done for your client: An item for a 15-minute call to review the case with no context might leave a client feeling confused or anxious about the charge.

Consider: Katy Young of Ad Astra Law Group prioritizes adding clarity and detail to bills because she believes it creates trust—which makes her clients more willing to pay.

4. Bill frequently, and consistently

With the right system, bills and reminders can be sent out quickly, so there’s no reason to put off billing your clients. Sending out smaller bills consistently can lower the shock of a large unexpected bill. Plus, there’s the added benefit of encouraging a smoother cash flow for your firm

5. Automate, automate, automate

There is plenty of software available to help automate routine tasks, so you can spend your time and energy on things that can’t be automated, like answering difficult questions or giving your clients peace of mind.

Before implementing any software, please note that process should come before technology. Understand the kinks in your billing processes, then look into tools that could help improve them.

Some examples include:

  • Using software like Clio Manage to generate draft bills in minutes
  • Using the InvoiceSherpa software to automatically chase late invoices
  • Accepting credit card payments to get paid faster

Setting The Right Rates For Your Firm

To start calculating your firm’s billing rates, read this article on how to calculate your hourly rate based on your cost of doing business and the number of billable hours you expect to record in a year (if your firm bills hourly instead of via flat fee or contingency). Then, check how closely your chosen rate tracks against market rates. 

Here’s a look at benchmark lawyer hourly rates from the 2019 Legal Trends Report, including actual rates and rates adjusted for cost of living in each state:

Map of US with lawyer hourly rates
 Some interesting statistics:

  • The highest average hourly billing rate by state was $346 per hour in New York
  • The lowest average hourly billing rate by state was $158 per hour in West Virginia
  • The highest average hourly billing rate by practice area was a tie between bankruptcy law and intellectual property lawyers at $340 per hour
  • The lowest average hourly billing rate by practice area was for juvenile law at $87 per hour.

If you’re low compared to your state’s average firm billing rates, consider raising your rates. If your rates are higher, think carefully about how you’re providing extra value to your clients to make that rate make sense.

However, at the end of the day, remember that the rate you charge is to some extent up to you. If you’d like to charge a little less to keep legal services affordable for others in your community, that’s completely fine.

Goodbye billable hours: alternative billing arrangements

What are billable hours? This has long been subject to debate amongst law firms. The practice is alive and well, but plenty of lawyers advocate that this isn’t the best way to charge for legal services—at least not for every practice area.

Here are some alternative billing arrangements:

Subscription-based law firm

With a subscription-based firm, you provide clients with legal services on an as-needed basis for a set monthly subscription fee. This setup works well for small business clients who may need regular help with trademark applications, proactive IP protection measures, transactions, and more. 

This leads to a more predictable income for your firm and smoother working relationships. It can be a challenge to get clients to buy into the idea if they’re used to the billable hour, but it’s worth it.

Sliding scale fees

If you work with clients with lower incomes, sliding scale fees may be appropriate. Clients pay fees based on their household income, rather than a standard rate. This approach can help your firm access more clients by making your services more affordable.

Unbundled services

The idea of “unbundled” legal services refers to limited scope representation. The limited scope attorney and the client agree to define the attorney’s involvement in their case. Unbundled legal services can vary greatly, depending upon the agreed-upon task(s), in both litigation and transactional matters. Examples might include evaluating a case or transaction, providing limited litigation or transactional guidance, or suggesting court documents or transactional documents to be prepared.

Flat fees

If you’re able to accurately scope the amount of work required for certain types of cases, flat fees can be an excellent approach to billing. They create clarity on costs up-front, and are a form of value-based billing—meaning that you bill based on the value you provide to your client, rather than commodifying your time.

Of course, there’s some risk of underestimating the work required for a case and setting fees too low. But with diligent case scoping, flat fees can provide an excellent alternative to the billable hour.

Contingency fees

With contingency fees, there’s potential to help clients who can’t afford a lawyer, since you’re paid a percentage of the money paid out to the client if the case is successful. Depending on the case, this amount can be quite substantial.

Of course, there’s also the risk that you won’t get paid for your work. But, if you can stomach the risk, billing on a contingency basis is a great way to build a profitable practice and serve those who otherwise might not be able to afford your services.

Note: Contingency fees are prohibited for certain types of cases, so double-check your state’s ethics rules before deciding to bill on contingency.

Evergreen retainers

Evergreen retainers simplify the process of getting paid on time. Here’s how it works: Your client provides an original retainer held in trust against which legal services are billed—and when their trust account hits a predetermined minimum balance, they replenish the funds.

Notifying clients when trust funds are at or below the minimum balance required is the key to success here. In this case, technology can help by automating notifications when a client’s trust drops below the minimum balance.

Payment plans

Given that 44% of legal firms say clients don’t pay their bills because they lack the funds to pay at once, according to the 2017 Legal Trends Report, offering payment plans can be a big help for ensuring your firm gets paid.

Before you start, create clear guidelines for when to offer payment plans, draft an agreement template to determine how payments will be collected, what methods of payment will be accepted, and what happens when a payment is late.

Then, set up a system for billing clients and collecting funds to help automate the repetitive work.

Reasonable fees and price transparency

When it comes to ethics and billing, clarity is key. Rule 1.5 of the ABA Model Rules of Professional Conduct states that a lawyer may not collect an “unreasonable fee” or an “unreasonable amount for expenses.” The ABA provides eight factors to consider when determining whether a fee is reasonable, including fees charged for similar legal services, the reputation of the lawyer, and any time constraints.

A best practice is to make your bills as clear and accurate as possible. If you’re billing by the hour, provide clear, detailed notes on work performed. If you’re billing via fixed fee or contingency, ensure you’ve got solid reasoning as to why your fees are reasonable.

If you’re in the UK, you’ll need to be mindful of the SRA’s price transparency rules, which state that price information must be provided in a clear and easy-to-understand format. Other requirements include the need to provide a total cost, explain the basis of your charges, and communicate what is and isn’t included in your services.

Billing Reporting And Monitoring

growth chart

To keep your billing process on track, you’ve got to keep a close eye on outstanding balances, payments, and revenues. Here are a few reports you can use to monitor your law firm’s financial  process and keep your billing process running smoothly:

Accounts receivable report

The Accounts Receivable Report helps firms determine amounts outstanding on all open and past due invoices on a per-user, per-client, and per-matter basis. The report details amounts due on approved outstanding invoices, partial payments made towards those amounts, and credit notes applied to invoices.

Accounts receivable aging report

The Accounts Receivable Aging Report helps firms track unpaid bills. It divides overdue accounts receivable into aging categories (e.g., unpaid bills 1-30 days old, 31-60 days old, and 61-90 days old). This enables you to get paid faster by efficiently following up with clients whose bills are overdue.

Billing history report

The Billing History Report provides a detailed view of open receivables, past-due receivables, and paid invoices. This provides a complete history of your clients’ invoicing.

Matter balance summary report

The Matter Balance Summary Report gives your law firm a snapshot of outstanding in receivables, as well as how much is work in progress, and expenses in progress, on a per-matter or per-client basis. It allows your firm to look at what future revenue remains to be collected for each matter.

Invoice payments report

The Invoice Payments Report gives firms a detailed view of payments on invoices for individual matters made towards individual service and expense items, and the users responsible for those line items. 

Revenue report

The Revenue Report helps your firm visualize and quantify key performance metrics on a per-user, per-client, and per-matter basis. The report details hours, expenses, and taxes in terms of unbilled, billed, and collected amounts.

How To Get Paid Faster

Law firms often find that it takes too long to get paid. And, looking back to the 2019 Legal Trends Report, of all hours invoiced to clients, 14% are never paid.

Here are four tips to improve collections at your law firm.

1. Improve your timekeeping

One of the most important ways to improve cash flow is to implement diligent timekeeping and recordkeeping habits. How can you collect on time billed if you haven’t tracked it? Take notes on what you’re doing, review outgoing calls and emails, and, as mentioned above, track time as you go.

2. Bill consistently

Think for a minute about the way you handle bills in your personal life. When these bills come at a predictable time, you can budget accordingly and pay them on time. When bills are unpredictable and inconsistent, it’s harder to stay on top of things.

Getting bills out on time, at the same time each month, will help your firm collect faster.

3. Send regular reminders

Don’t let forgotten law firm bills slide under the radar. Make it a habit to send regular reminders to clients who haven’t paid. Automating this process will help save time and money.

4. Accept credit card payments

If you’re still asking your clients to pay by check, you may be asking them to use a payment method they haven’t used in years (or one they’ve never used). In the digital era, clients expect convenient online payment options. As a lawyer, you can give them this option with online credit card payments.

All it takes is a bit of due diligence to ensure you’re accepting credit card payments following ethics rules.

Legal firms need a credit card processor that does not allow chargebacks on trust accounts, and that does not take fees from trust accounts. So, if a client disputes a charge that results in a chargeback, and the credit card company withdraws money from a pooled trust account, this may cause an ethics violation.

Usually, this means using a credit card processor tailored specifically towards lawyers, such as Clio Payments.  

Bend Law has found that using the Clio Payments software had significantly improved its billing and collection process:

Law firm billing software

Investing in billing software for law firms makes a huge difference in how you spend your time—and mitigates your risk of error.

Clio Manage lets you easily create branded invoices and customized billing plans, and accept payment by credit card. It manages trust accounting features and also integrates with your favorite accounting programs including QuickBooks Online, Xero, and Klyant—so you can keep all of your financial information in sync.

Investing in legal billing software to help your process run more smoothly can be invaluable for your firm: Chris Trebatoski of Treblaw LLC gets all his bills out each month in a matter of 15 minutes with Clio—a task that used to take him much longer at a larger firm.

“I spend less time doing my time entries and sending out my bills using Clio than I spent being the Chair of Billing and Collection at a large law firm calling other lawyers saying, ‘Could you get your bill out?’,” he says.

Again, it’s crucial to think about your process before technology. Don’t be afraid of a learning curve, software like Clio Manage is very intuitive, and a small investment in learning how it works can yield a lifetime of simplified billing practices for your law firm.

 

Note: The information in this article applies only to US practices. This post is provided for informational purposes only. It does not constitute legal, business, or accounting advice.

 

Categorized in: Accounting

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