Professional Services Accounting ARTICLE -

Secret of Law Firm Survival: Good Cash Flow

Target Audience: Legal Professionals, Professional Service Firms, Law Firm Partners, Law Firm Accounting

One of the major reasons some businesses, including law firms, have survived the recession while others haven’t can be summarized in two words: cash flow. As basic as it sounds, you need enough cash on hand to make payroll, pay vendors and cover debt. But this can be tough when new matters are only trickling in and you’re having trouble collecting on closed ones.  

If you have deadbeat clients, collections should be a major priority. But there are a couple of other things your firm can do to maintain healthy cash flow:

1. Put it in writing. Law firm income statements typically provide an inaccurate picture of cash flow because they reflect income and expenses only for tax filing purposes. So to prevent cash emergencies, incorporate cash flow forecasts into your annual budget.

Then monitor cash flow throughout the year. Your firm’s bookkeeper or controller should regularly prepare an updated cash flow statement reflecting all cash inflows and outflows, regardless of whether they’re taxable income or tax-deductible expenses. This includes payments for office furniture and equipment, debt repayment and partners’ draws.

2. Follow some basic rules. Simple office procedures can also significantly improve your cash flow. For example, checks should be deposited daily — this helps reduce the chance of theft or loss and can minimize loan interest and bank fees. Also, have your bank “sweep” your account daily to ensure excess funds are applied against your line of credit.

Another of the best weapons against occupational fraud can also keep your cash flowing: Require that all checks over a certain amount be reviewed and signed by an equity partner or the managing partner. This enables partners to stay in touch with how the firm’s money is being spent, so they’re more likely to be proactive about cash flow.

Find out how our expertise in professional services accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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