Professional Services Accounting ARTICLE -
Don’t Wait Until it’s Too Late Develop Good Cash Flow Management Techniques Now

Target Audience: Law Firm Professionals, Lawyers, Cash Flow Managers, Firm Budgeters, Cash Management Strategizers

The practice of law is an honorable profession. But it’s also a business, and, like any business, it must have a healthy cash flow to keep it going.

Sole practitioners learn the lessons of cash flow management swiftly: If they don’t collect enough cash, they can’t pay their bills. However, as attorneys band together and form a law firm, things can get a bit trickier. Usually a bookkeeper or controller keeps track of the finances, and worrying about the firm’s cash position becomes their problem — that is, until there isn’t enough cash to pay draws. Then everybody becomes painfully aware of how important cash management is.

Keep the flow flowing

Developing sound cash flow management techniques isn’t difficult, and having them is essential if you want to avoid cash emergencies. Several tried-and-true cash management strategies that almost any firm can implement include:

Change your billing cycle. If a matter settles on the third day of the month, do you wait until the first week of the next month to bill it? Why wait? With the proliferation of new and easy-to-use time and billing software, no matter the size of your firm, you can generate bills on a daily basis. Sending the bill out quickly helps increase cash flow in two ways: 1) the bill gets out sooner and, theoretically, gets paid sooner, and 2) the work you have done for clients has more psychological value immediately following the activity, so clients are more likely to pay quickly if you send the bill while they still place a high value on your services. In short, it’s easier to get paid now than later.

Get a retainer for every matter. This strategy is even more important for those matters that require substantial out-of-pocket expenses such as travel costs, filing fees, court reporters, document transcribing and copying, and expert witness fees. Also consider severely limiting or eliminating client advances. Don’t get in the habit of functioning as a bank for your clients.

Deposit checks every day. Nothing good can come from keeping checks in a drawer waiting for a once a week deposit. Depositing funds daily will help reduce loan interest and banking fees. It may also help prevent losing checks through carelessness or theft.

Require an owner/partner to sign all checks over a minimum amount. This practice will help management stay in touch with how the firm’s money is being spent. It may also help deter internal embezzlement schemes because bookkeepers may be much less inclined to write a check for cash or to a phony vendor if they know a partner is scrutinizing each check and looking for proper documentation and authorizations.

Have the bank “sweep” your account daily. This technique will ensure excess funds are applied against your line of credit, reducing your interest expense. If you have no debt, it will transfer the excess funds into a money market account, so your money can work for you.

Don’t take on deadbeat clients. Every new client matter should be reviewed and approved by either the managing partner or a new client committee. Why is this important? The committee should check the conflict of interest questionnaire, client credit information and the proposed billing arrangements to ensure your firm isn’t signing on a possible deadbeat client.

Remind clients to pay their bills. Several days before payment is due, have an administrative person call your clients as a friendly reminder to pay their bills. Some firms may mail out their reminders, but by calling you can immediately determine whether the client has received the invoice, if it’s in the client’s accounts payable system, and if it’s set up for on-time payment.

Follow up quickly on payment issues. If your reminder calls uncover any payment issues, either the partner in charge of the matter or the managing partner should resolve them as quickly as possible. Speed counts for everything when it comes to managing receivables. The likelihood of getting paid decreases with every day an invoice spends on the past due list.

Make a cash flow forecast part of the annual budgeting process. This is a vital step for law firms where significant transactions that affect cash, such as partner distributions, computer purchases and repayments of bank debt, don’t show up on the income statement. A well-thought-out budget and a cash flow projection combined with a strategic plan are essential for good financial management. Also, don’t let the forecast gather dust; update it monthly so your firm always has current, accurate information available.

Finally, keep a rein on overhead. Simple, commonsense actions, such as keeping the supply cabinet locked, turning down the thermostat, and comparing prices when shopping for office furniture and services, can go a long way toward saving cash and creating a healthy bottom line.

Know what’s right and do it

Most attorneys know that to maximize their own financial well being they must consent to systems and financial controls that will help successfully manage the firm. Unfortunately there is often a gap between knowing the right thing to do and actually doing it.

But by following the simple rules laid out above, your firm may find that managing its cash is a relatively painless exercise that can reap big rewards.

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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