Many legal professionals, especially those working in small to medium-sized firms, are waiting significant lengths of time to receive payment for their services. In fact, as highlighted in the recent Clio Legal Trends Report, over half of these firms have outstanding bills that are over three months old.
An accumulation of unsettled invoices not only negatively impacts firm finances, but can also hinder the client-attorney relationship. To investigate the extent of this issue, the Clio Legal Report implemented an accounting measure known as ‘lockup’ to document revenue that remains unbilled and uncollected. Lockup is delineated into three categories: realization lockup (work done yet unbilled), collection lockup (work invoiced but unpaid), and total lockup (the sum of realization and collection lockups).
According to Clio, the legal industry lags in its collection speed with the median lockup just over three months. Alarmingly, a quarter of these firms experience lockup periods of six months or more. This increased lockup period seriously depreciates cash flow. As detailed in the report, a law company with an annual billing of $500K and a 50-day lockup would have an additional $68,500 cash on hand.
While collection lockup is directly influenced by maintaining updated retainers and easy billing solutions, it is also deeply affected by realization lockup. The principal takeaway from the report, then, is that it’s in a lawyer’s best interest to bill their clients as soon as possible. By doing so, the chances of payment is higher as clients are more likely to pay while they’re still in the satisfaction period. Keeping bills current will also prevent clients from delaying payments and exacerbating further the lockup issue.
In conclusion, managing lockup efficiently can be an important factor in ensuring financial stability and fostering better client relationships.
For more details, refer to the full report on Above the Law.