Lock-up is often an uneasy subject of discussion at partners’ meetings. But there is no getting away from it – it is something all law firms should be managing effectively.
By now, you’d think the penny would have dropped for legal practices. However, a number of surveys over recent years show that the problem may well be getting worse.
Recent surveys suggest that over one-third of UK law firms have lock-up in excess of 150 days. Even the average level is around 130 days. No self-respecting managers in non-legal businesses would find this state of affairs acceptable.
Let’s get the definition correct before looking at the problem and its potential solutions. Lock-up is defined as the sum of unbilled work in progress and debtors (excluding VAT).
It doesn’t sound so bad when you say it quickly, but excessive lock-up can have serious side-effects. If you have an annual turnover of £1million and lock-up of 150 days, that’s £410,000. Or more accurately, it means you don’t get paid for work until 5 months after completion. That doesn’t help you pay your staff and overheads and it will cut into your drawings savagely.
It gets worse. You are, in effect, bankrolling your clients meaning you may have to borrow from your bank. So, how can you resolve the problem?
Get the basics right.
It always pays to be open with your clients about billing from the get go. You can do this by:
- Agreeing the bill for the work at the outset so that there are no nasty surprises for clients.
- Agreeing interim billing at key stages of the work.
- Making it as easy as possible for clients to pay you – credit cards and even PayPal can assist.
- Ensuring all bills submitted are for immediate payment – why give 30, 20 or 10 days’ grace when it’s due now?
- Asking for a payment up-front – this can particularly help with new clients whose credit history may be unknown.
Begin as you mean to go on.
These points are all very well when you’re instructed. What can you do to reduce lock-up once the work has commenced?
- Invoice immediately on completion.
- Invoice when you reach one of the interim work points.
- Put in place a strong, disciplined credit control system.
- Consider using an independent credit controller to collect late payments.
- Ensure partners and staff play their part in chasing and collecting bills.
- If the work timescale extends through no fault of your own, discuss an interim arrangement.
- Stop ongoing work if the previous fee has not been paid.
- If a new or repeat client has a history of late payment, consider whether you want their business.
It’s all about cashflow management. On your balance sheet and P&L your firm may look healthy and profitable. But remember, businesses go bust not through lack of profit, but through inability to pay the bills. You may wish to consider outsourcing your legal cashiering to improve performance. Take a look at LawWare’s sister company Your Cashier for further details.