How to keep your law firm’s cash flow healthy
Turnover is vanity, profit is sanity, but cash is reality. You’ve probably heard the well-worn business cliché many times, but it remains as true as ever. A law firm’s financial health and ability to survive and grow is not necessarily determined by its sales or even it margins, but the amount of cash it can access.
Cash is and always will be king. If a business can’t access enough cash to pay its bills on demand or borrow to get through a short-term cash flow problem, it can quickly spell disaster.
And cash flow problems can affect large law firms just as much as any other. As reported by The Law Society Gazette, UK law firms’ bank debts increased by 36 per cent in the year to May 2016 (“an average of £38,000 per equity partner”), with firms preferring to use bank finance rather than external investment to fund their growth. The problem is made worse by cash being tied up in unpaid billing and work in progress. Lockup among law firms was reported to average 140 days by the Gazette, according to research by chartered accountants Hazlewoods.
Cash flow issues
Cash flow is the relationship between cash entering and leaving a business. Robust cash flow management starts with knowing how much cash you can access and how much will soon enter and leave your business bank account. More fortunate law firms may be able to build up significant cash reserves to weather short-term cash flow issues.
Working with cash flow forecasts – based on reliable income predictions and detailed cost estimates – allows businesses to look ahead (usually for up to a year or more) to predict if any serious cash flow problems are likely. Steps can then (hopefully) be taken to avoid a short-term cash flow blip (persistent cash flow problems require much more drastic action).
Cost and credit control
Remaining lean and efficient by tightly controlling costs is essential to sound cash flow management. There should be a sound business reason for every penny your law firm spends, with waste ruthlessly eradicated. Savings can often be made even on so-called ‘fixed costs’ (eg energy), while seeking as favourable terms as possible from your suppliers ensures that cash stays in your bank account longer.
While ensuring fees remain competitive and acceptable to clients, law firms also need to maximise their earnings if they are to keep their cash flow healthy. And law firms need robust credit control systems. Corporate clients should be thoroughly checked, of course, with credit perhaps limited initially, and increased only when earned. Your credit terms should never be overly generous.
Your billing and invoicing should be efficient, so that fees are paid as soon as possible. And, at a glance, your accounts people should be able to see when bills and invoices are overdue, so payment can be chased straight away.
No law firm or any other business can afford to ignore cash flow problems, especially if they persist. Some difficult decisions about your costs, fees, credit control and cash management might be the only way to ensure lack of cash doesn’t seriously affect your law firm.