Law Firm Accounts Receivable and WIP: Collection Cycles and Cash Flow
For firms that bill by the hour or on a periodic basis, revenue is earned long before it becomes cash. Attorneys record time, time becomes unbilled work in progress, work in progress becomes an invoice, and the invoice becomes cash only when the client pays. Each step takes time, and some value can be lost along the way through write-downs, discounts and uncollected bills. Managing law firm accounts receivable and work in progress is one of the most direct ways a firm can improve cash flow without winning a single new client.
This article focuses on the billing-and-collection cycle in hourly and periodic-billing practices. Contingency practices have a different cycle, discussed in our guide to contingency fee law firm cash flow. For the firm-wide lender perspective, see how lenders evaluate law firm cash flow.
The Lockup Cycle
Firms often refer to the combined time that value sits in unbilled work and unpaid invoices as lockup. It has two parts:
- Work in progress (WIP): time recorded but not yet billed
- Accounts receivable: amounts billed but not yet collected
The longer value sits in either stage, the more working capital the firm needs to cover payroll and overhead in the meantime, and the greater the risk that some value is never collected.
Where Value Leaks
Value can be lost at several points:
- Time capture: work performed but not recorded
- Billing write-downs: recorded time reduced before an invoice is sent
- Collection write-offs: invoices discounted or abandoned
- Delays: late invoices that clients question or pay slowly
Firms often track realization, the share of recorded time that ultimately becomes collected revenue, to see where leakage is occurring.
Practical Ways to Shorten the Cycle
Capture and bill promptly
- Encourage attorneys to record time contemporaneously
- Bill on a consistent schedule rather than when convenient
- Review unbilled time regularly so it does not age
Set expectations at engagement
- Use clear engagement letters that describe fees, billing frequency and payment terms
- Consider advance retainers where appropriate, handled in accordance with applicable trust account rules
- Discuss budgets for larger matters so invoices are not a surprise
Make paying easy
- Offer convenient payment methods
- Send clear, detailed invoices
- Follow up consistently on overdue balances
Assign responsibility
Collections improve when someone owns them. Many firms give responsible attorneys visibility into their clients’ aging balances and involve them in resolving slow payments, supported by billing staff.
Collection practices and the handling of client funds are subject to professional rules that vary by jurisdiction, so firms should confirm their policies with appropriate guidance.
Reports Every Firm Should Review
- Accounts receivable aging by client and attorney
- Unbilled work-in-progress aging
- Realization rates by attorney, client and practice area
- Write-offs and write-downs over time
- Collections compared with billings each period
These reports help owners spot problems early and make better decisions about clients, pricing and staffing.
Why Lenders and Buyers Care
Lenders review receivables to understand liquidity and the reliability of revenue. Old receivables and frequent write-offs raise questions, while consistent collections support the firm’s cash-flow story. When applying for financing, firms should be prepared to provide aging reports, as outlined in our guide to law firm loan requirements.
Buyers also scrutinize receivables. In a practice sale, whether receivables and work in progress are included in the price, retained by the seller or handled separately is a significant negotiating point. Our law firm due diligence checklist covers what buyers review.
Working Capital for Timing Gaps
Even well-run firms experience timing gaps, such as when a large client pays slowly, the firm hires ahead of growth or seasonal patterns affect collections. A firm-level line of credit or working capital facility can help bridge these gaps when it is sized to the firm’s billing cycle and used alongside sound collection practices rather than in place of them.
Better Collections, Stronger Firm
Shortening the time between work and cash improves liquidity, reduces borrowing needs, supports partner distributions and makes the firm more attractive to lenders and buyers. For many firms, it is the most accessible financial improvement available.
US Professional Funding works with established law firms on working capital, lines of credit and other financing. Learn more about our law firm working capital financing.
