What are debtor days?
Debtor days is the average time it takes a business to get paid after issuing an invoice. The average debtor days for all SMEs in Australia is 56 days. This means it’s taking nearly two months to get paid for products and services provided. In the meantime, many of these businesses lack the funds to cover the costs of operating a business.
For legal service firms, debtor days (also called days sales outstanding) represent a serious challenge for law practice managers. In addition work-in-progress days can also be substantial. Research conducted by the Australasian Legal Practice Management Association (ALPMA) found that work-in-progress can range from 39 to 104 days on average, depending on the size of the practice. When you combine debtor days with work-in-progress (WIP) days it’s called ‘lock-up’. This represents the money that is tied up in current work as well as completed work that hasn’t been paid for yet.
Debtor days, work-in-progress days and lock-up for law firms
The ALPMA research breaks down these elements by annual firm revenue as follows:
|Firm revenue||Under $5M||$5M – $10M||$10M – $20M||$20M+|
|Work in progress days||68||104||39||47|
Given that law firms are waiting up to 167 days after starting work to get paid, it’s crucial that legal practices take steps to minimise debtor days, WIP and the resulting lock-up.
Ways work-in-progress days for law firms
While the debtor days clock starts when an invoice is created, work-in-progress is the first part of this equation. One way to reduce WIP is to issue interim invoices for work completed, although the project may not have been completed or issue resolved.
The other way to reduce work-in-progress days is to invoice immediately when work is completed. Some firms have regular billing cycles and only create invoices on set dates, such as the middle and end of the month, or each fortnight. Waiting for these billing intervals adds to work-in-progress days.
Steps to reduce debtor days for law firms
Here are a few ways accounting firms can reduce the debtor days, get paid faster and improve cash flow.
1. Implement credit policies and procedures
Credit policies and procedures is a good first step for lowering average debtor days. These should detail terms and conditions and the steps taken to approve new clients. These can include completing credit checks, checking credit references, credit history and credit score, and screening out risky clients. In addition, policies and procedures should include the steps to be taken when accounts are overdue, such as when to decline additional work when invoices are overdue, and when to refer debts to collection agencies. The procedures documentation can include email templates and phone scripts to use to follow up when invoices are not paid on time.
2. Confirm fees upfront
One of the causes of late payments is misunderstanding of fees for legal services. If there is an issue with these, the client can raise it before the work is completed. Invoicing regularly for work in progress will avoid surprises for clients.
3. Make it easy for clients to pay you
Offering more ways to pay you can help decrease debtor days. This includes offering payment options, including bank transfers and credit cards. Ensure that the amount, payment terms and payment options are clearly communicated on the invoice. Include contact details for clients to get in touch if they have any questions about the invoice.
4. Automate accounts receivable
Automating reminders for overdue invoices will help to reduce debtor days. Research has shown that reminders are effective for getting invoices paid. One study by ezyCollect, an accounts receivable software developer, found that 59 per cent of overdue invoices require three or more reminders before they’re paid. The research found that:
- 21 per cent of invoices are paid after the first follow up
- 20 per cent are paid after a second reminder
- 32 per cent are paid after the third reminder
- 13 per cent are paid on the fourth reminder
- 10 per cent are paid on the fifth reminder
- 3 per cent are paid on the sixth reminder.
Once the invoice is overdue, it’s essential to follow up. Automating this step will help you lower the amount of unpaid invoices and boost average debtor days.
5. Offer legal fee funding
Professional fee funding is another option for accounting firms that want to get paid faster and improve cash flow, which has become increasingly popular. With this form of finance, the professional fee funding lender pays invoice amounts in full within a few business days, if the client has been approved for finance. The lender then manages the repayment from the client, usually in the form of direct debit payments. The client usually pays a fee for the option of spreading payments over several months, so there is sometimes no upfront cost to the accounting firm. In addition, the accounting business can reduce the time and cost of managing accounts receivable.
Legal fee financing is not entirely without risk, though. If a client does not pay the amount owed to the fee funder under the payment plan, the accounting firm still wears the risk of bad debt, and is required to return the outstanding amount not paid by the client.
In addition, while professional fee funders can often help legal firms get paid faster, they aren’t a good option for legal practices that want to offer their clients more generous payment terms. Payment terms offered to clients through professional fee funding are usually rigid, making this option less favourable to those who want to offer their clients flexibility, or extended payment terms, and help them with cash flow.
6. Offer Moula Pay as a finance option for business legal services
There’s another solution that makes to reduce debtor days for law firms and get paid much faster after providing legal services to businesses. Moula Pay is a long-term solution for managing accounts receivable.
If you sell to other businesses and your customers pay with Moula Pay, you get paid upfront. At the same time, your customers get up to three months free from interest and repayments, or can take a longer-term repayment plan if needed.
Become a Merchant with Moula Pay to:
- Get paid upfront – give your customers flexible payment terms that improve your cash flow.
- Stop chasing payments – outsource the stress of chasing late payments, and let Moula take the risk of unpaid invoices.
- Sell more, more often – giving your customers access to more funds means they can spend more with you.
- Reduce the cost of accounts receivable – when your customers use Moula Pay, you no longer have the costs associated with managing their accounts.
Melanie Power is an accounting thought leader, with 30 years’ experience empowering professional services businesses. She uses Moula Pay in her own practice and says, “Moula Pay has empowered me to get paid upfront, and saved me chasing invoices. Since seeing how much my own business and debtor days have improved, I’ve referred several of my clients to become Merchants, too. It’s been a real game-changer for cash flow.”
Learn more about how Moula Pay can give your customers great payment terms, improve your cash flow, and save you from chasing late payments.