Worked Value to Collected Corrections and Adjustments - Best Practices

Worked Value to Collected Best Practices

Scope and Purpose

The purpose of this document is to provide a summary of worked value adjustment options for the worked to collected business cycle.

Its scope extends across providing perspective and use-case in context of best practices for optimal reporting and decision-making outcomes.

Highlights

Work-in-Progress and Accounts Receivable are important firm assets that in sum refer to the total investment that the law-firm has in its client.

Decision makers depend on the execution of firm policies and procedures with respect to worked value to collected adjustments inherent in the worked to collected business cycle to effectively measure results and readjust to firm objectives.

In practical terms, this means that the decision maker must rely on the effectiveness of worked value adjustments applied to better understand corrective actions needed to bridge the gap between worked and collected.

Best Practices

Valuation of Worked Values

Worked values are the reference point for efficiency and realization metrics, therefore the application of a rate structure that accurately reflects agreed-to pricing outcomes for the matter, provides best practice worked values from which to identify spillage to collected values.

Correction of Work-in-Progress

The correction of a time and/or disbursement entry mistakenly charged to the matter, is not a worked-value adjustment but a modification to Work in Progress.

Time Entries:

Time entry errors corrected through options such as entry transfer to the right matter, change of the time entry transaction date and/or correction of the working member (the timekeeper), do not affect hours worked. However, modifications to time entries to reflect the true amount of time spent, or the reversal of duplicate time entries, reflect correction that will impact the total hours worked for the firm.

Disbursement Entries:

Many corrections to disbursement entries are also capture through entry transfers to the right matter, changes to the transaction date etc., however as disbursement entries are also often the result of third-party costs, the correction of errors may imply affecting the originating accounting objects.

Worked Value Adjustments

The worked-value adjustment options available within the worked to collected business cycle do not impact the total hours worked or the quantity of disbursements charged.

Write-Off of Uncoverable Work-in-Progress

Non-recoverable unbilled time and disbursements for clients no longer considered going concerns (i.e., bankruptcy, receivership etc.) or with whom the organization no longer would maintain a business relationship (i.e., the client is unwilling to pay for services) are considered bad debt expense and must be billed at their recorded values, so they can be included as a receivable write-off for greater control, consolidated visibility for all stakeholders and also to affected client.

Non-recoverable unbilled time and disbursements fairly recorded which cannot be billed due to non-client related circumstances should be written down to zero (no written-off). Whereas the former will fairly track and report the efficiency loss to stakeholders, the latter will skew the efficiency metrics and losses due to client-related circumstances.

Unrealized unbilled time and disbursements which are not inefficiency losses written down to zero during the billing process or bad debt expense billed and processed as AR write-offs, should therefore be minimal reflecting a third scenario; limited values recorded after the last billed was issued. These “unrecovered” values show gaps in the timely capture of entries during before the last bill is issued as well as in the use of the inactivation status to prepare the matter for close. It is considered best practice to use the unbilled time and disbursement write-off functionality to track this type of inefficiency, supported with a policy that includes a value threshold. When the values exceed this threshold, it is best to generate an internal zero-dollar invoice to reflect the nature of the loss more fairly, an inefficiency in context of the worked values for the matter.

Impact:

An unbilled time write-off does not affect the working member’s total hours worked. The hour written-off remains an hour worked, classified as written-off.
An unbilled disbursement write-off does not affect the matter’s total disbursements charged. The disbursement written-off remains a disbursement, classified as written-off.
Unbilled entry write-offs have a negative impact on realization and profitability calculations.
Unbilled entry write-offs can be reversed. The reversal process deletes the write-off with the same impact as if the user would create a back dated entry. This action impacts the historical attribute included in most reports, however if unbilled entry write-offs are used as intended, the occasional reversal will be immaterial.

Due to its intended use-case and impact – unbilled entry write-offs are not a typical occurrence for most organizations. If used, they are limited to small amounts to clear matter balances and initiate the file closing process. If used in this manner, the GL Master account label should be modified to reflect the nature of the GL operations.

Write-Downs, Write-ups, Discounts and Premiums

Write-Downs and Write-ups:

Write-Downs and write-ups are captured in their respective GL accounts for time, and also for disbursements to provide financial granularity for in-depth analysis. Included in the billing variance and realization metrics, they breakdown is available on several reports. .

Entry Write-downs to 0.00:

Part of the invoice preparation process, this fee modification method is used to reflect full efficiency losses captured at an entry level before the invoice is completed. It is executed to reflect the request that a time entry should be written-off on a going concern.

Entry Write-downs or Write-ups:

Part of the invoice preparation process, this fee modification method is used to reflect efficiency losses or gains captured at an entry level before the invoice is completed.

Working Member Write-downs or Write-Ups:

Part of the invoice preparation process, this fee modification method is used to reflect efficiency losses or gains in context of the working member (the timekeeper), captured before the invoice is completed.

Total Fee Write-downs or Write-ups:

Part of the invoice preparation process, this fee modification method is used to reflect efficiency losses or gains in context of worked values included in the invoice, captured before its completion.

Discounts and Premiums:

Although part of the total billing variance these fee-based measures are also accounted for in their own GL accounts and reflected on various reports.

Discounts:

Part of the invoice preparation process, this fee reduction method can be pre-set at the client or matter level. It is used to reflect agreed pricing agreements and/or goodwill/marketing decisions.

Premiums:

Part of the invoice preparation process, this fee enhancement method which can also be pre-set at the client or matter level, is used to reflect agreed pricing agreements.

Summary:

These actions are reflected in relevant measures such as billing variances, effective billing rates and realization rates, tracked separately for deeper analysis at the GL and matter level - affecting financial and management reporting opportunities.

The allocated-to member will receive their allocated value based on the results of the allocation scheme applied unless the allocation is manually overridden in which case the overrides will take precedence.

Credit Notes and AR Write-Offs

It is considered best practice to issue credit notes to reduce previously billed fees to adjust the invoice to a mutually agreed value and to reserve the receivable write-off process to consolidate the bad debt expense for non-collectable invoiced values due to the client’s unwillingness or inability to pay.

Both invoice reducing vehicles allow for the categorization of the cause through the selection of firm-defined reasons.

The receivable write-off can be ignored for collection purposes, if the intent is to continue collection efforts in some or all the AR Write-offs.

Credit Note:
- A client document used to reflect internal inefficiencies and/or agreed fee and/or disbursement reductions wrongly captured after posting and sending the invoice.
- Tracked separately for deeper analysis, this process triggers a credited fee or disbursement record in corresponding GL accounts (typically presented as revenue or recovery reducing measures instead of consolidated as bad debt expense). Credited fees and disbursements are also reflected in billing variances, effective billing rates and realization rates type metrics.

AR Write-Off:
- An internal process used to reflect client credit issues – unwillingness to pay for efficient agreed work completed and/or the client’s inability to pay (receivership, bankruptcy), triggering bad debt GL operations.
- Tracked separately for deeper analysis, the AR write-off process triggers a fee or disbursement bad-debt expense record in the GL and AR write-off reported metrics.
- The AR write-off process includes the “Ignore for collection purposes” option, and it is often combined with the use of the “Rejected” status at the client level. The use of the client status provides immediate visibility of the credit risk when an existing matter is re-opened or a new engagement accepted, for a client where firm management would want to first recapture previously uncollectible values and/or mitigate potential losses on any new work accepted.

Invoice Cancellations

A rare occurrence, the invoice cancellation process is intended as a corrective tool where there are no other alternatives.

Best Alternatives:

To affect changes to posted invoices issued, the following tools are considered as better alternatives to cancelling the invoice.

Use a credit-note to reduce the invoiced balance and meet the client’s invoice total expectation or to correct an overbilling error,
Use a supplementary “No-time” invoice to include an agreed upon premium which was missed reflecting the missed fee allocation measures,
Use a supplementary “time and/or disbursements” invoice to include missed time and/or disbursements.

Invoice Cancellation as the Only Option:

Understanding the impact of the dates selected for the invoice cancellation on its replacement as well as the ability to modify time and disbursement entries’ worked values, is critical to a successful outcome when invoice cancellation is the only option. Select an invoice cancellation date equal to the:

Current date if the invoice was never sent to the client. Cancel the invoice with a current cancellation date and create a current replacement invoice so it is not already aged by the time it is sent.
Invoice date of the invoice being cancelled, to make internal adjustments which cannot be handled through any other corrective measure or functionality available or if once cancelled there is an intention to “correct” WIP values before the entries are rebilled. This option implies that the replacement invoice will be backdated to have the same invoice date as the invoice being cancelled.

Invoice Cancellation Dates and the Impact of Historical Reporting:

Due to the historical nature of most reports and the imbalances that can occur when not following a natural progression for actions taken, it is not possible to create an invoice that includes entries which were part of a cancelled invoice, with an invoice date that is older than the last cancellation date for the affected entries.

Also, once the invoice is cancelled and the entries are returned to WIP, corrections to WIP values may trigger an imbalance on certain reports. It is recommended that once an invoice is cancelled the WIP be protected so it is not revalued. This is available in system settings.