Anatomy of an Invoice: Best Practices for Client Billing in the Legal Industry

Written by Andrew McDermott in Blog, Legal
April 11, 2018:

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Do your clients ignore their bill?

Is client billing a struggle? Is it a hassle to get your invoices paid completely or on time? Maybe lost billables, also known as ‘shrinkage,’ have been a problem for your firm?

If so, your invoices may be to blame.

Your invoice has a tremendous amount of power. In the right hands it’s a tool you can use to confirm or deny the image of your firm. It’s a helpful way to encourage loyalty and support or, a surefire way to turn clients off.

Your clients won’t admit it, but they’re terrified

They’re nervous about working with attorneys.

Put yourself in their shoes. Imagine a professional tells you they’re going to help you at the discounted rate of $768 per hour. They’ll tell you when they’re finished working, then they’ll send you a bill at the end of the month.

Pretty random, right?

You’re vulnerable and completely in the dark. Will they itemize absolutely everything (e.g. dry cleaning, phone calls, emails, text messages, lunch breaks)? Do they inflate billable hours?

It’s a reasonable question when you come across stories like these.

That’s the fear.

Read through these examples of overbilling and something interesting stands out. Of the 800 lawyers doing court appointed work in this story, only 100 were overbilling. The others were “billing scrupulously.” When it came to client billing, most lawyers were trustworthy.

Your firm’s image depends (partially) on your billing

In the legal industry, a bill that’s ignored is a missed opportunity.  

Best practices suggest that you work on the essential elements that are part of client billing. That’s important because a missed opportunity on your invoice creates all kinds of little problems for your firm.

  •       Clients who refuse to pay on time or at all
  •       Fee disputes from unhappy clients who refuse to pay a cent more than they have to
  •       Clients spend less time and money with the firm
  •       The perception that invoices + follow-up is sleazy, offensive or rude
  •       Losing billables to shrink
  •       Clients threatening to file a bar complaint

Suddenly, these problems aren’t so little, are they?

Include the right details on your invoice and you’re far more likely to receive the benefits you’re looking for. Your clients won’t feel like they’re being nickeled and dimed to death.

Obvious, right?

Only it’s not entirely obvious. The anatomy of an invoice isn’t as straightforward as it sounds. Sure, there are basic details you’ll need to include. There are also hidden details that move your client relationship forwards or backwards.

What’s worse, these details are cumulative.

They’re designed to work together, with the benefits slowly improving client trust over time.

 

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Invoice best practices in client billing verify trustworthiness

Your invoices give customers peace of mind. Best practices in client billing show clients you’re…

  •  Clear. Clients know exactly what to expect. There are no hidden surprises, no gotcha moments where customers are blindsided by an unexpected bill, dollar amount or unfamiliar term. Clarity sets the tone for the relationship, determining whether clients are a fit for your firm, or not.
  • Transparent. Which line item is more trustworthy, “Prepare motion for summary judgment” or, “Divorce?” Which line item gives clients the impression that you’re working specifically on their behalf? Most people would list the first line item as more transparent.
  • Charitable. Unseen discounts, pro bono work, hidden write-downs and write-offs, they do nothing for you or your clients. If you’re giving customers a bonus, incentive or discount, make sure it’s listed on their invoice.
  • Setting boundaries. Are your payment terms net 30? What’s your late fee? Your invoice enables you to set subtle boundaries with clients.

Here’s the question though. What should be included in your invoice?

Sample invoice for client billing. Annotated with components that are addressed in the following paragraphs.

Your invoice should cover three categories.

1. The basics

The barebones data your client needs to actually pay your invoice. This data is the absolute minimum. If you’re using a tool like Bill4Time to track your time this is simple and straightforward.  

Your invoice should clarify…

  •       Who to pay
  •       Who is responsible for payment
  •       How much to pay
  •       When to pay it
  •       Acceptable payment methods.

If you’re in business and you’re getting paid, you understand the basics. We all understand the basics of client billing so that means we need to focus our attention on…

2. Obvious data

  • Your recent / previous payment. This is a form of positive reinforcement. It gives clients a running tally of their recent payments and it shows that their payments were posted to their account. Normally this isn’t something your clients will even look at. This is the first place they’re look if there’s a balance dispute or disagreement about the amount that’s drawn from their retainer.
  • Bill date and details. This shows your clients when the bill was printed. Here’s why this matters. Chronic late payers may be wondering why wasn’t my payment reflected on my invoice?  This gives you the opening you need to have a conversation about due dates.
  • Hours/fees breakdown. This gives clients a sense of your performance and hourly rate. It’s a simple heuristic clients can use to see who did what and when. Is a junior associate taking twice as long to handle something a partner can finish in half the time?  Are you accidentally billing paralegals out at senior attorney rates? It’s an easy mistake to make, but it’s also considered fraud.
  • Late fees and discounts for early payment. There are obvious and hidden aspects to this but it’s an easy and simple way to set boundaries with clients.

3. Hidden data

  • Outlining what you did versus what you gave. An unseen discount is worthless to your client. It’s worthless to you. Even worse, bringing up a discount after the fact is far more likely to create resentment. Clients are more likely to assume that your discounts are used circumstantially to gain leverage over them.
  • Listing work completion dates. This isn’t as common as you’d expect but it’s a helpful way to minimize payment disputes. A detailed breakdown communicates (a.) you’re working consistently on specific tasks (b.) the time spent on these tasks are reasonable and appropriate.
  • Payment arrangement details. On the one hand, you probably don’t want to advertise payment arrangements as it may encourage clients to pay late or pay less. On the other hand, it’s something that can be used to encourage delinquent clients to pay vs. dealing with write-downs or write-offs.
  • Payment due dates are pretty basic. But there’s also a hidden element at play. When it comes to follow-up, attorneys are notoriously bad at it. It’s incredibly common for customers to ignore an invoice for legitimate or illegitimate reasons. The lack of follow-up is common but it’s also devastating to your firm’s cash flow.

So why does this happen? There’s a variety of reasons – don’t want to appear needy or greedy. Attorneys don’t want to offend their client. Here’s what this lack of follow-up really communicates to your client. You don’t need or care to be paid for your hard work.

  • Rules and boundaries e.g. reward those who pay early, penalize those who pay late. This gives customers a clear indication of where they stand and what’s expected by all. If the rules are clear there’s should be no confusion about what you’re doing or what needs to be done. Just make sure it’s reflected in your initial agreements.

These details may not seem like much. But they’re crucial in your client billing, if you’d like to avoid…

  •       Clients who refuse to pay on time or at all
  •       Fee disputes from unhappy clients who refuse to pay a cent more than they have to
  •       Clients who spend less time and money with the firm
  •       The perception that invoices + follow up is sleazy, rude or offensive
  •       Losing billables to shrink
  •       Clients threatening to file a bar complaint

It’s important to include the right details in your invoice, but it’s only half the story. What’s the other half?

Transparency.

Namely, what’s the level of transparency you should use for line items? If your firm bills clients hourly, your work is straightforward and simple. Make sure your invoice line items are specific and clear.

It’s never that simple though is it?

Along comes the alternative fee arrangements (AFAs). Options for flat fee and non-billable payments for clients. As it turns out clients like these AFAs. Flat fee options give clients clarity, predictability and peace of mind. These AFAs come with an unpleasant downside, though.

Shadow billing.

You know how it works. Your legal billings are set at a flat rate, but you still track and report billable hours. It’s supposed to be helpful. You and your client get to see if the flat rate price you quoted them is in line with reality. They get a flat rate, you get helpful data to adjust your price for next time.

Bill Josten at the Legal Executive Institute explains why shadow billing is a problem.

Imagine a … “law firm and client agree to undertake a given matter for a flat fee of $1 million. Everyone is happy with this rate and the client feels it represents a fair fee for the work to be performed.

Now the law firm happens to have a particularly innovative attorney who figures out a new way to complete the task at minimal cost. On a billable hour basis, the firm incurs only $50,000 in costs to quickly produce a top-quality result.

The client sees the work product and is thrilled. But when they see the shadow bill they become irate. How could the law firm bill them $1 million for something that took only $50,000 to complete?”

It all depends on your strategy doesn’t it?

If you bill hourly, clients focus on minimizing the amount work done on their behalf. If they need something done cost becomes a motivating factor (instead of quality). If you bill at a flat rate, shadow billing becomes a problem.

It’s about transparency.

When in doubt, obey the law. Be honest, open and ethical. Give your clients a clear idea of what to expect.

Because that’s what your clients expect.

They want the right amount of data to maintain trust and openness. So what should you avoid? It’s actually pretty simple. Avoid anything in your invoice that deceives or overwhelms your clients.

When it comes to client billing, one size doesn’t fit all

Billing in the legal industry – it doesn’t have to be complicated.

Your invoice has a tremendous amount of power. In the right hands it’s a tool you can use to confirm or deny the image of your firm. It’s a helpful way to encourage loyalty and support or, a surefire way to turn your clients off.

Your invoice is the key.

Your clients don’t have to be terrified. They don’t have to be nervous when working with you.  Put yourself in their shoes. Work to become an attorney who’s open and transparent. Imagine sending out a bill your clients are pleased to pay. It’s possible, if you rely on best practices for client billing.

Do that and you’ll find your invoices help to generate the client loyalty and support you need.

 

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Written by Andrew McDermott

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