Getting paid as a solo or small law firm

Billing has always been a tricky part of managing a law firm – and it’s not getting any easier. At the big end of town, clients are increasingly stalling on law firm bills as a subdued economy weighs on businesses, leading them to push payment down their to-do lists.

Smaller firms, and solo operators, are also feeling cashflow strain, with National Australia Bank’s latest SME Business Insights Survey pointing to cashflow as a key concern for a third of business services companies, like law firms, in the three months to September 2024.

Nationwide, about 30 per cent of firms reportedly have bills outstanding beyond 90 days, much longer than the 40-day average for the rest of the economy.

Against this challenging backdrop, Sonia Gibson, a Sydney-based accounting expert who works with small law firms, says she’s a “big fan” of fixed fee billing.

“It further reduces friction when it comes time for the client to pay,” Gibson tells LSJ.

On this point, her big piece of advice is to “spend the time upfront to properly scope the work to ensure it is charged appropriately”.

“Discipline is required in identifying work that falls beyond the scope of the engagement and communicating additional charges,” Gibson, from Heart Accounting, says.

“Get the client’s authority to direct debit their bank account on completion of the work, at the time they sign the engagement letter. Platforms like Go Cardless are an easy option for small firms to use and they integrate seamlessly with accounting software like Xero.”

For smaller firms it’s not unreasonable to request a 50 per cent upfront payment, or even 100 per cent upfront, before work gets underway, she adds.

While full upfront payment may work in some circumstances,  legal services disrupter Sprintlaw adds it may be a big ask in other settings, such as when dealing with a new client who isn’t familiar with the firm’s service.

In such cases, Sydney-based Sprintlaw suggests asking for a deposit: “It makes sure you get paid something, even if you client defaults on the rest of the bill. And, as an added bonus, it’s a great way to build trust and strengthen you business’ relationship with the client.”

Another option, especially where a firm can foresee payment issues, is a payment plan. Sprintlaw says this “is particularly helpful if your client is having cash flow issues”.

“Setting up a payment plan can ensure you get paid, as it will take into account what your client can afford and over what period of time payments are to be made.”

Joe McConnell, a criminal defence and traffic law specialist, agrees that charging on a fixed fee basis results in a better chance of getting paid.

McConnell’s Queensland-based firm offers fixed-fee arrangements wherever possible, which he says gets rid of surprises or unexpected costs during the progress of matters and helps to bed down costs from the outset.

“To further streamline the process, we require funds to be placed in our trust account prior to specific stages of the matter being completed. This allows us to focus on delivering our legal services without delays caused by payment issues,” the lawyer adds.

“In our experience, transparency is the cornerstone of fostering trust and ensuring timely client payments. From the very first consultation, we make it a priority to be upfront about costs, providing clients with a clear, detailed understanding of their financial obligations and the specific stages of their matter.”

Small firms also need to remember to get the basics right on billing.

This means plain English “comprehensive engagement terms” that cover scope of work, fees, payment terms, and process for “out of scope work” such as how it will be addressed and how additional work will be charged, according to Heart Accounting’s Gibson.

“If clients know how they will be charged and what the expectations around engagement are, then there’s less likely to be friction when it comes time to pay the fee,” she says.

“On larger engagements, I recommend a meeting with the client to go through the engagement terms. People tend to skim read, miss important details and blindly sign. This way, when the terms have been signed, you know you’re covered.”

On the flip side, it’s sometimes the law firm that are the issue, according to Stacey Price, founder of Healthy Business Finances, an accounting firm with legal industry clients.

Here, Victoria-based Price reminds small legal operators to “be on top of your accounting”.

“We see so many clients being owed money from customers and they don’t’ even realise as they are simply not on top of what is going on,” she tells LSJ.

“Do your bookkeeping weekly, be on top of raising invoices and checking who has or hasn’t paid. So many clients realise people haven’t paid months and months after the service is performed and then they are too embarrassed to follow up for payment, so they write it off. “That is your hard-earned cash down the drain. If you are on top of your financials each week and each month, those follow up conversations are nowhere near as icky.”

Another factor is that firms sometimes make it overly difficult for clients to pay.

“It sounds obvious,” Price says, “but set up a direct debit arrangement with something like Go Cardless and have as part of your contract that this is a mandatory way to accept payments. This will streamline your payments in no time at all.”

Jacob Aldridge, from Como Legal Coaching, a business consultancy which specialises in assisting law firms, agrees that lawyers can be part of the problem on late payments.

He points to inconsistent billing practices at solo and small firms as a factor, with his advice being to “invoice and communicate regularly”.

“Partial payments on a monthly basis, even when the money is in trust, delivers a better client experience than a large bill only at the end of a phase or matter,” he tells LSJ.

“Communicate well in advance when funds in trust are running low, and if you do find yourself in a debtor situation be sure to follow-up regularly.”

He says that while “few lawyers pursue this profession because they love sending invoices” failing to “make payments easy for clients can only lead to frustration” and disillusionment.

“Poor cash flow management is one of the main reasons sole practitioners answer ‘no’ when they complete our ‘Do I Still Want to Be a Lawyer?’ quiz.”

The Australian Legal Practice Management Association, too, says law firms are partially to blame for late payment. It argues they often juggle multiple management priorities, putting a low priority on chasing invoices, and can be reluctant to approach clients about money.

“For decades, the existence of ongoing conflict of tension and a lack of priority has held many law firms back from realising their cash flow potential,” it says, noting that law firms commonly offer credit terms of 14 days, but on average are paid between 50 to 60 days.

Whatever the drivers for unpaid fees, experts agree that sometimes the only option is to call in a debt collector. At this point, big questions are when and how to do it.

Healthy Business Finances’ Price says law firms, irrespective of size, need to have specifics on debt collectors spelled out in initial client contracts. She advises lawyers to list the debt collection agency that they plan to use and stipulate that collection charges incurred – typically up to 30 per cent of the invoice value – will be added on top of the overdue invoice.

“This can be a large cost so you want to be able to add this on top of the initial amount outstanding,” she says. “This will hopefully be enough of a deterrent for pesky late payers. “But if not, you need to have the balls to follow through. Send the invoice to debt collection and cross your fingers that the professionals will recover the funds for you.”

Chasing non-paying clients is not just an issue for Australia’s legal profession.

In the United Kingdom, for instance, 58 per cent of SMEs wait on money tied up in unpaid invoices  at any given moment, according to research from UK banking giant Barclays.

Deepak Shukla, CEO of London-based law firm Pearl Lemon Legal, says getting paid on time is a challenge faced by many solo practitioners and small law firms across the country.

Like his Australian counterparts, Shukla says it’s best to set expectations upfront.

“It’s important to communicate payment terms to clients before any work begins. A formal written agreement, outlining your fees, payment schedules, and what happens in case of late payments, helps protect your practice,” he tells LSJ.

“Transparency is crucial. Ensure your clients know when payments are due, the payment methods accepted, and any penalties for delays.”

With such an agreement in place, he urges firms to take a hard line on non-payers. A big mistake, according to the entrepreneur, is for law firm to be “overly lenient” with clients who delay payments by being too flexible on payment.

“While flexibility is important, enforcing payment terms is equally crucial,” he says.

“Sending timely reminders, setting up recurring billing, and even using payment management tools can streamline the process. Automation can reduce the time spent chasing payments and allow you to focus on practising law.”

In addition to proactive billing practices, he suggests developing strong relationships with clients based on mutual respect.

“When clients feel valued and understood, they are more likely to prioritise your invoices.”

Across the Atlantic, Gordon Hirsch, managing attorney and founder of United States based Hirsch Law Group, emphasises “crystal clear expectations from day one”.

He points to the firm’s retainer agreements, which include more than “boilerplate payment terms” and cover how the billing cycle works, when invoices are sent and exact due dates. They also have a clause for late payments specifying a late fee and an interest charge if the balance is overdue by more than 30 days, Hirsch says.

“This isn’t just a deterrent, it’s a safeguard for the firm’s cash flow,” he tells LSJ.

On the practical side of getting paid, he says the firm’s billing system helps. It is integrated with a client portal that allows clients to access itemised invoices at any time.

“If a client disputes a charge, they can see the specific task, date, and time spent on it. This transparency resolves 90 per cent of potential billing issues before they escalate.”

Another tip, according to the Illinois-headquartered litigator, is to deploy automated reminders  sent three days before a due date, on the due date itself, and seven days after if payment hasn’t been made.

“These reminders are customised to the client’s preferred communication method—some prefer texts, while others respond better to emails.”

When it comes to very tardy payers, or repeat offenders, he urges a proactive approach.

“For those with a history of late payments, I request a larger upfront retainer or require them to prepay for specific milestones in their case, such as completing discovery.

“This way, I’m reducing the financial risk while still providing the legal services they need.”