AIG Posts Third Consecutive Quarterly Loss Exceeding $5b

Warning to firms who represent AIG:  Watch your AR.  AIG reported losses from their mortgage portfolio of credit default swaps (CDS) would be between $5b and $8.5b.  In a Reuters story published August 7th, AIG has recorded “nearly $25 billion in unrealized losses from writing down the value of its CDS portfolio”.

Although this may mean nothing as far as your relationship with AIG is concerned, it may foretell some changes internally at the company.  AIG is already known as a tough client when it comes to billing guidelines and getting paid. 

They are a public company and they still must please their shareholders.  Whenever a large corporation posts losses in consecutive cycles, job losses almost invariably follow.  Even if you don’t lose your contacts with the company, it wouldn’t be a shock to see them delay payment of bills.  Some firms already must wait 60 days after acceptance of an electronic invoice to get paid.  Considering that AR is considered in critical arrears at 90 days, that places firms in a tough spot in terms of cash flow. 

I encourage those who represent AIG to stay in touch with their contacts and keep an eye on any invoices that aren’t being accepted or are delayed longer than normal.

Tracking Billing Cycle Metrics

The law firm business model is based on the measurement of 5 key profit drivers:  Rate, Realization, Utilization, Leverage, and Margin.  I would add another metric:  Cash flow.  You can really see a return on your investment in time and effort if you have a lot of time in WIP (work in process) and AR (accounts receivable).

The critical metrics that affect cash flow are the average days to bill, average days to collect (and by extension the sum of both to create the total billing cycle) and the average days in AR. Using a rolling 12 month period will give you an annual baseline, but you can also track it monthly. 

In the graph below, The variables are the total fees unbilled, total fees billed, and total fees collected over a 12 month period.  Knowing these numbers, you can calculate the total receivables outstanding during this time span, the average monthly and daily fees unbilled, billed and paid and your average days to bill, collect and days outstanding.

These metrics are critical for measuring your efficiency both at billing your work and collecting your fees.  If these numbers are high, then a review of your processes is due. Click on the graphic above to download and test with your own numbers.