Only 48% of law firms respond to requests for accrual estimates, and this is a big problem.
Timely accruals are key to telling the story of your legal department. These estimates give your team and company a clearer picture of your legal spend, the projects being worked on, and the pace at which law firms are handling specific matters. And these figures get passed up the value chain—from your GC to your CFO, CEO, and shareholders—people you don’t want to keep waiting for or give incorrect information to.
But without month-end accruals, your balance sheets and general ledgers won’t be accurate. In fact, public companies have had to restate earnings because of missed legal accruals. That’s definitely something you want to avoid!
Still, your vendors aren’t completely at fault here. They have their own finances to worry about and may not be familiar with an accrual-based process. Many firms are just used to billing for services rendered, recording each invoice as accounts receivable instead of accrued revenue. But when this happens, you may have already gone past your deadline to record it as an accrued expense or accrued liability in your monthly record.
Like any type of behavior change, it can initially be difficult to convince law firms—many of whom see accrual submissions as extra work—to start routinely providing timely accrual estimates. Fortunately, we’ve cracked the code on how to do so while minimizing stress for both parties.
Tips for working with your law firm
Your law firms aren’t just vendors. They’re strategic business partners who are an extension of your legal team. As such, your goal shouldn’t be to collect an accrual number from them at the end of the month, quarter, or year but to foster a long-term relationship that’s focused on achieving your departmental and company-wide goals.
Building strategic partnerships with your law firms and getting them to actively participate in accrual estimates boils down to four key points:
1. Let them know the importance of month-end accruals.
Communication is key to guiding your law firms to become active participants in accrual estimates. Without providing feedback on the numbers they submit, it’s hard for them to know where to be accurate and why.
Share the importance of accruals and stress the idea that it’s not just an accounting exercise. Timely billing and accurate forecasts are critical factors when measuring the quality of service and determining which law firms are best suited to help you achieve your goals.
Open communication must also extend to the individuals who compile your unbilled estimates. At mid-sized and smaller law firms, it might be the partner. At large law firms, it’s common for the billing department to put together your accrual estimates and handle your accounts payable. In either case, make sure to have open communication with these individuals for improved compliance.
2. Explain your billing guidelines and any updates to them.
As the foundation of change management, communication is key to seeing your accrual submission rates increase. Providing clear and concise directions on how to submit accruals ensures you receive consistent accrual numbers from all the law firms you work with and accurate data about your accrued expenses. The data doesn’t provide value if each of your law firms calculates unbilled estimates differently.
You want your billing guidelines to cover key points like formatting, coding, and timing, but you also don’t want to overwhelm vendors by making the document too lengthy or complicated to follow. That just increases the likelihood that law firms will ignore your guidelines. Keep things as simple as possible, and emphasize the most important information using bold text and bullet points.
Make it clear to your vendors that you’re here to support them if they have questions, and keep them updated on any changes to the accrual submission process so everyone stays on the same page.
3. Give feedback.
Feedback, both positive and negative, is one of the most important ingredients in building an effective working relationship and obtaining positive outcomes. If you’re getting inaccurate accrual estimates from your law firms but aren’t showing them where and how they’re off, you won’t be able to create a continuous feedback loop, and you’re not going to see any improvement.
Strive to provide feedback as soon as possible. If you identify an outlier or red flag—something that is clearly not right—respond immediately. This helps eliminate issues as soon as they occur, and you can work toward proactively changing law firm behavior.
4. Tell them the advantages of accrual-based accounting.
If the law firms you have hired are already using an accrual-based method of accounting, you will have no trouble getting month-end data from them. However, if they are using the cash-based method, it will be a real challenge to get them to send accrual data for the month-end close process. In that case, you will have to sell them on accrual-based accounting.
You can start by sharing the advantages of accrual-based accounting. The biggest advantage of accrual-based accounting is data accuracy. With this method, your income statement and balance sheet show a true picture of your business. Your income and expenses, assets, and liabilities are all much more accurate since you take into account the amount that hasn’t been billed yet. With the help of this data, you can detect patterns in your performance, identify areas for improvement, and show your partners and stakeholders how well your business is doing.
This means that any organization that switches from cash-basis to accrual-basis accounting will improve their reporting, gain stakeholder trust, and be able to make accurate data-driven decisions.
Getting your partners to switch from cash-basis accounting to accrual-basis accounting may seem like a huge ask, and the final decision rests with them, but the process is made significantly easier with the help of the latest software.
Creating strategic partnerships
Law firms are a valuable resource for legal departments. They’re a key constituent in helping you protect your company, minimize risk, and achieve your short- and long-term goals.
If you’re looking to increase law firm participation with accrual estimates, legal e-Billing software can streamline and automate the accrual collection process, saving you and your legal department time while reducing errors.
Don’t have an e-Billing solution? Or maybe your current solution doesn’t handle accruals to your satisfaction. Download our guide, 8 Ways to Vet Your e-Billing Solution for Law Firm Adoption, and make sure you have the best solution for both you and your law firms.
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