With most law firm partners privy to uncomfortable discussions regarding the level of lock-up within the business, this article highlights 7 steps that will improve the efficiency of the firm’s credit and collections processes in order to reduce lock-up and increase cash flow. 

Liquidity is critical to the survival of any business, and most businesses have at some time had to make some difficult decisions to protect their cashflow. A recent survey by the engineering services trade bodies ECA and BESA highlighted :

“nearly half of small business owners have been forced to put a hold on their own wages and almost one in ten employers had even had to delay staff wages because they didn’t have the cash on pay day.”

A key contributing factor to the ever-increasing struggle to effectively manage cash flow is the growing culture of late payment, both in the UK and across our major international trading partners.  This tends to be most prevalent amongst larger, enterprise level companies who pay their smaller suppliers late in order to inflate their own cashflow – this is often done in the knowledge that their business is so critical to the supplier that they are unlikely to risk any aggressive steps to pursue prompt payment.  The devastating effects of this exploitation of their size and influence on smaller firms by many larger businesses has led to the new Prompt Payment Code, launched by the CICM and now taken on as government initiative.  

However, this practice is not limited to big business, and smaller firms will also manage their payment schedules to support their cashflow.  It is therefore critical, whatever the size of your clients, that you have the credit management processes in place to monitor and chase payments. It is testament to the old adage that those that shout loudest get paid first  – and those that don’t will be the easiest option to put to the bottom of the payment queue.  

Managing cashflow is especially complex for professional services companies such as law firms where hours billed are allocated to a specific individual and it is often the lawyer themselves who will be required to chase payment, mediate billing disputes as well as try to secure further business.  It is therefore unsurprising that compared to other verticals, the legal sector is often woefully behind in terms of the effectiveness of its billings and collections, and that lock-up levels remain an uneasy subject of discussion at many partner meetings.  The PWC 2019 Annual Law Firm Review highlighted how firms continue to struggle with accessing their cheapest source of finance by looking to reduce lock-up. 

“The difference in year end to average lock up ranges from 11.7% (Top 26-50 firms) to 18.7% (Top 10 firms). This means there is a significant lost cash opportunity.”


With profit margins being increasingly squeezed, optimizing the efficiency and effectiveness of billing and collections can enable law firms to minimize bad debt and improve cash flow and the bottom-line. Outlined below are 7 key considerations to help you reduce lock-up and improve working capital whilst maintaining those all-important customer relationships.

1. Establish a clear payment policy

It may seem obvious but ensuring your contract with your clients clearly outlines your payment terms and the consequences for defaulting makes sure everyone is on the same page from the start – this will minimise potential payment issues down the line and therefore helping reduce lock-up. Ensure your payment policy

  1. Specifies an interest charge for overdue balances. 
  2. Includes purchase order text that makes the buyer responsible for collection charges. Note in writing that the delinquent customer will be held accountable in the event of any collection or other legal fees incurred to secure payment.
  3. Makes payment easy.  Providing a variety of payment methods preferably including a secure online payment capability can remove barriers to pay and speed up payments.
  4. Provide direct debit options – if you have multiple clients making regular monthly payments then direct debit can not only facilitate payment but reduce the labour on your client side.

2. Monitor Your Customers’ Payment Habits

If your terms are 30-day, and your good customer always pays in 40-days, then you probably shouldn’t use any collection procedures until they go past their normal cycle. However, there will always be some businesses that will never pay until they get the nudge, and they should be identified so your collections teams can prioritize a call. 

3. Adjust the billing cycle to increase on-time payments. 

Review when you usually invoice your clients and why. Sometimes just sending the bill mid-month instead of at the end of the month will ensure your invoice is on the payment run. 

4. Follow up quickly when payment is later than expected. 

When a payment is past due, send a reminder or make a phone call. Sometimes the cheque really does get lost in the mail. A timely follow-up can fix problems like a lost invoice or a dispute which is preventing payment.

5. Call your customers

Actively speaking with your customers to understand their internal processes can help you gain visibility of any barriers to payment and enable you to make adjustments to your billing strategy to help facilitate prompt payment going forward. This could be in terms of understanding when they usually close their payment run to invoicing them smaller amounts more frequently to avoid delays in getting high value invoices approved.

Making direct contact with the person who handles accounts payable is also the most effective way to collect on overdue accounts as a call is far harder to ignore than a letter or an email.

6. Offer flexible payment terms for customers who are struggling to pay

If a customer is genuinely having problems paying, offering a payment schedule can ensure you at least recover some of your outstanding monies. As well as providing customers with relief that the matter can be resolved, when these customers return to a stronger financial position, you will have earned some customer loyalty that might lead to future business.

7. Outsource 

Chasing outstanding monies can not only become a distraction, but often effect those all-important client relationships as it is difficult to actively seek additional work whilst chasing outstanding payments on historic activity. If you do not have a dedicated in-house credit and collections team, or your in-house team are struggling to efficiently service the volume of collections or you just a have a ledger that needs clearing up, an outsourced credit-control or collection agency can provide a flexible, scalable solution.

With most credit and collections agencies operating on a no-win no-fee basis, with no upfront costs, this can be done at minimal or no risk to the business. Outsourcing can be particularly effective if the business is sitting on a growing ledger of ageing debt – which many firms typically write off after 18 months. With VAT still due after 4 years on unpaid invoices, working these ledgers to reduce lock-up could have a significant impact on the bottom line.

Text written by Richard Brown

CRO of Global Debt Recovery & Customer Contact provider 4D Contact, Richard has over 20 years of experience helping global businesses, across multiple verticals, optimise the efficiency of their credit and collections processes to meet business objectives.

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