Years ago I registered the phrase “The Business of Law®” because it summarized the basics of my law firm consultancy and contained such an important truth—one that many lawyers seemingly still fail to understand. Nothing is more important to the future of law firms than conducting themselves like businesses. So, in terms of professional development, law firms must understand that the most useful professional development entails development of their business of law.
In particular, development of the business of law involves cash flow management because, after all, without income, there is no business/practice. In other words, professional development means becoming more financially savvy.
Cash Flow Management Basics
Understanding cash flow is essential to business competency. The cash flow statement can have many names: a cash flow budget, a statement of cash, or a forecast. Whatever the moniker, it’s important to review this statement at least weekly, if not daily. It is the single-most important tool for the success of any business activity.
Many office expense items cannot be controlled or reduced once set in place. However, some expenses can be modified given the right circumstances. You might, for example, negotiate a rent reduction with your landlord. Other savings items could include:
- Library expenditures (you can share a library or use your county law library)
- Payroll (to a more limited extent if a solo practitioner)
- Dues and subscriptions
Savings in these three areas alone can be substantial. Further, if you know when to anticipate low and high cash-flow periods, you can postpone, advance, or finance equipment purchases.
Effective cash flow management often comes down to the steps any lawyer can take to get funds into the bank account as quickly as possible. Often these are commonsense efficiencies that, over time, can make a tremendous difference.
Nine Steps to Greater Control
- Manage Your Collection Cycle
Develop alternatives to diversify your receivables stream—for example, by billing one-fourth of the alphabet each week. You’ll receive money from one-fourth of your clients weekly rather than once per month. This evens out your receipt of cash over the month. You could also shorten your monthly billing cycle, sending out invoices on or about the 25th of the month so that clients receive statements on or before the first day of the following month. Since most people pay their bills on or about the first of the month, a bill that comes after that is frequently kept for payment until the following month.
- Send Statements After a Particularly Beneficial Psychological Event
If you bill when clients are happy because you’ve won a motion or negotiated a favorable deal—even if somewhat before or beyond the normal billing date—they’re more likely to pay quickly. Such billing places the client on the peak of the “satisfaction curve,” the time of least resistance for payment of fees. Later, the client will invariably forget how important you were in the process of the result and wonder why the bill is so high. Once in that state of mind, the statement for services will sit unpaid until some future date.
- “Age” Your Accounts Receivable Once a Week
Determine which clients are behind on their payments, even if you have been working on other matters. Forgetting or ignoring “old” clients results in forgetting or ignoring the accounts receivable. This results in the failure to collect your money. Remembering old open accounts is vital. On one hand, you will be able to pursue collection with the regular, weekly reminders that money is owed to you. On the other hand, you will be able to thank a client who has paid, the kind of courtesy that pays off in increased goodwill.
- Use Trust Accounts Effectively
Flat fees or retainers can be withdrawn from a client’s trust account as specified in the engagement agreement. Withdrawal can be predicated upon reaching specific events: a date certain, the filing of a complaint, or the signing of a settlement or merger agreement. Even retainer fees can be deposited into a general account if the agreement says that the retainer is not for future work but for the lawyer specifically being engaged (and thus taken off the market). Some lawyers will split the fee, making part of it a nonrefundable retainer and placing the balance into the trust account for withdrawal as the work is performed. This method makes a clear distinction between the two elements, again as specified by an event or date that triggers a withdrawal from the trust account and places it into the general account. This avoids waiting for the client to say yes after the fact and allows you to get the money sooner.
- Maintain a High Average Daily Balance
Most banks calculate the “average daily balance” in your bank account. This is one of the most significant bits of information with which a bank works in analyzing a loan request. You want to maintain as high a balance as possible. This can be done either by keeping a large sum of money in the bank or by keeping limited funds in the account for a longer period of time. You can keep funds in the account longer by depositing revenue immediately upon receipt and spreading the payment of bills throughout the month. Do not pay your bills all at one time: this will cause an exaggerated dip in your account balance rather than provide an even flow of funds.
- Don’t Wait to Deposit Checks
This is the first rule of cash flow management. Too many catastrophic events can happen while a check is awaiting deposit. The client may, in the interim, become angry, for whatever reason, and stop payment on the check. The check may reach your client’s bank at a time when the account is overdrawn. The client may have been named as a defendant in a lawsuit for which attachment procedures are available. Because of this, the client’s bank account may be “marked” for a sum large enough to cause the presentation of the check you are holding to be rejected. In each of these cases, a check that had been deposited immediately would have cleared the client’s bank and been credited to your account.
- Consider an Automatic Bank Sweep
Banks provide for an “automatic sweep” on a daily basis. Establish a minimum amount of money, such as $2,500, to remain in your general account. The exact sum depends on the amount of checks and deposits that pass through your bank account each month. Then, instruct the bank to segregate all funds in excess of this amount at the end of each day and “sweep” or transfer those “excess” funds into a money market (interest-bearing) account until needed. You also can instruct the bank to call you, or to automatically transfer funds into the general account from the money market account, in the event that the balance goes below the established minimum amount.
- Negotiate Immediate Access to Deposits
Some banks place a “hold” on funds deposited with them until the funds have cleared through the banking system. This may be as long as seven days. However, you can negotiate with the bank so that you have immediate access to your deposited funds.
- Deposit All Checks from Clients
Do this even if the amount received does not match the amount due per the statement. Make a photocopy of the check. After making the deposit, call the client and ask for an explanation of the difference. You will ultimately reconcile the amount paid with the amount due; however, in the meantime, you will have deposited and benefited from the amount sent to you. The only exception is when there is a disputed claim, and a check is marked “paid in full” with the check amount being less than the amount owed to you.
Even with savvy business acumen and energetic marketing efforts to bring revenue into the firm “at the top,” failure to plug “holes at the bottom” with poor cash flow management will be more than disheartening.
About the Author
Ed Poll is the founder and principal of Law Biz, a management consulting firm for lawyers and law firms. Follow Ed on Twitter @LawBiz.