Cash Flow Management: Advice Every Lawyer Needs
What does your firm need to “live on”? How much money any law firm will need to survive, let alone thrive, is dependent on, at least, four factors: volume, growth rate, capital turnover, and credit terms. Let's examine each of these factors.
Volume
The greater your billings are, the greater the need for cash for the firm will be. That is because the time between when you send out a bill and when you receive payment averages more than four months, nationally. The more client invoices you have outstanding, the more cash you will need for your operations (payroll, rent, and so forth) while waiting for payment.
Growth Rate
Faster-growing firms will likely need more money for supplies and equipment, staff support, and office space. While you are waiting for clients to pay you, vendors, landlords, and utilities will be expecting payment immediately.
Capital Turnover
Capital turnover defines how often the firm's invested assets are being returned in revenues. Higher rates of turnover produce more revenue on the same amount of assets. The faster you get clients to pay you, the better your turnover ratio is. That is why you should review your receivables weekly to see who has and hasn't paid. Never wait until the end of the month to check turnover—that potentially loses thirty more days in getting the cash that you need.
Credit Terms
The more lenient your terms to clients, or the more client invoices you're willing to leave outstanding, the more cash you'll need while waiting for payment. Conversely, tough credit terms are likely counterproductive—clients who won't pay their bills won't pay the interest, either. Never give in to the temptation to extend credit in the hope that the client will give you more work.
The engagement letter should clearly state the consequences for failure to honor the agreed-on payment commitment. Never hesitate to contact clients when they are late with payments. In a worst-case situation, cut your losses and end the engagement, per ABA Model Rules of Professional Conduct Rule 1.16.
If you're looking for helpful advice on cash flow management for your law firm, contact a legal coach today at 800-837-5880.
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