Have you ever heard of a busy law firm that failed financially? Chances are the firm suffered problems with cash flow, the lifeblood of any business.
The bigger a firm grows, the more it relies on cash flow – that is, the money moving in and out of the business during any month. Cash moves in from clients paying for legal services; cash moves out when firms pay for expenses like rent, employee services, and taxes. When more money comes in than goes out, the firm has a “positive cash flow;” if more money goes out than comes in, the firm has a “negative cash flow.”
Without a positive cash flow, firms dip into credit lines and pay interest on the money they need to keep their doors open. Eventually, the firm sinks deeper and deeper into debt. And eventually, the cost of doing business tops the revenues of that business. Not a good thing. The solution is not necessarily putting the brakes on growth; the solution is actively managing cash flow. Here’s how.
Pay Attention to Cash
You became an attorney to represent clients, argue their cases, and make dramatic closing statements. But your commitment to client needs must be matched by your commitment to understanding and maintaining accurate financial reports that reveal how much cash is flowing in and out. Without reliable monthly, quarterly, or annual cash-flow reports and projections, you can’t know how much cash is in the coffers to cover your expenses. If you’re suffering cash flow gaps, reconsider how faithfully you keep and consult your financial reports.
Actively Manage Accounts Receivable
Nobody likes knocking on doors, begging clients to pay their bills. But cash-strapped firms often don’t have effective ways of collecting fees for service. If you’re having a cash-flow problem, look into speeding up your billing cycle, collecting larger retainers, and more diligently going after past due accounts. Consider outsourcing the accounts receivable part of your business, and let someone else keep track of and go after past due accounts.
Cut Back on Client Advances
Advances are funds you lay out while preparing a case, including lab fees, medical records, witness and experts’ fees, deposition costs, photocopying, and any other money you spend on behalf of the client. These advances can quickly mount, straining your cash flow. Find ways for clients to pay directly for these services, or bill them more frequently. If you’re a contingency fee firm, you’ll need more working capital to cover these advances.
Don’t Jump to Pay Your Bills
This doesn’t mean you should pay bills late, but don’t pay them early, either. You can improve cash flow by paying bills on their due date, instead of when they arrive in the mail.
Are you having cash-flow problems? Give us a call or complete the form below, and we’ll help you figure out what’s going wrong and how to maintain a healthy, positive cash flow.