Managing a Law Firms Cash Flow
Written by Ashley McDermott
Blogger
Cash flow is the lifeline of any business, and law firms are no different. Without it, the firm would be unable to pay its bills, staff salaries or other running costs. That is why it is so important to have a handle on your firm’s cash flow and understand how to manage it effectively.
A study by Byfield, in association with London Business School, states that cash flow is one of six main concerns of law firm managing partners. Thanks to many external influences out of our control, such as the pandemic, it is no wonder. During the first UK lockdown between April and June 2020, Gross Domestic Product (GDP) fell by 19.4%, an unprecedented amount [1].
While GDP has steadily improved since then, we still face inflation pressures, with the Consumer Prices Index (CPI) increasing by 9.1% in the 12 months prior to May 2022 [2]. So with this information in mind, managing and knowing how to improve your firm’s cash flow and using technology, such as legal practice accounting software, are essential business practices.
What Is Cash Flow in a Law Firm?
A firm’s cash flow is the movement of money in and out of the business. These expenses will include all operational costs, such as rent, staff salaries and other running costs, and one-off fees, such as refurbishments.
All businesses should have a cash flow statement that tracks all inflows and outflows of cash over a specified period, usually monthly or quarterly. Collating this information yourself can be time-consuming, which is why many legal firms are embracing law firm accounting software, as this technology can easily do it for you.
There are three types of cash flow for a business:
- Positive cash flow: This is when the businesses income is more than its expenses and has money left over at the end of the specified period
- Negative cash flow: This is when a business’s expenses are greater than its income and doesn’t have enough money to cover its costs.
- Break-even cash flow: This is when a business’ income is equal to its expenses and doesn’t have any money left over at the end of the specified period.
How to Manage a Law Firms Cash Flow
Knowing how to manage your law firm’s cash flow effectively is crucial for business longevity. By having a clear view of your finances, allows you to identify potential issues and ensure you are sticking to your budget.
Analyse Your Current Cash Flow
To evaluate and effectively manage the cash flow in any law firm, you must first understand where the money is coming in and going out. Ideally, you should look at your firm’s cash flow regularly, such as monthly or quarterly. If you don’t have any current cash flow reports, now is the time to start.
Your cash flow report should note recurring payments, such as utilities, as well as one-off or irregular payments. Next, see if there are any unnecessary expenses or if you can reduce any costs, for example, renegotiating or shopping around for better insurance rates.
Once you know where the cash is going, you need to see how much money the firm has generated. Knowing where your expenses sit in relation to your income will clearly indicate your current cash flow. Legal technology solutions can make it even easier for you to track your firm’s finances and produce accurate reports.
Look Into the Future
Forecasting your firm’s cash flow and having a financial model are essential to effective cash flow management. You need to be able to see when payments are due and plan accordingly, as well as know when you will have a surplus of cash.
Collating this analysis can be made simple when using cloud based services for law firms, allowing you to create concisely informed decisions for your business.
Automate Payment Methods
One way to help manage your firm’s cash flow is to automate as many payments as possible. This way, you can be sure that all invoices are paid on time, within the required 30 days unless otherwise specified, while simplifying the payment process for your clients.
Invoicing clients promptly and efficiently is paramount to maintaining a good cash flow. Using cloud based invoice management for legal firms, with integrated billing and invoicing functionality, can automate this process for you. Using technology can easily free up time for you to focus on other areas of your business.
Ensure You Are Billing for Your Time
Many lawyers undervalue their time and, as a result, do not bill for their total worth. You must accurately track your time, ideally with law firm billing software, so you can bill your clients correctly and ensure that your law firm’s cash flow is healthy.
In a report conducted by MHA, 62% of firms reported an increase in the chargeable time since March 2020. 16% of these firms focused on a “more intensive and regular focus on billing and cash collection”, and 8% had introduced the use of technology.
Have a Cash Reserve
When managing a law firm’s cash flow, one of the most important things you can do is have a cash reserve. A reserve is a sum of money set aside to cover unexpected costs or lean periods. A cash reserve gives you peace of mind knowing that you have a safety net in place should anything unexpected happen.
How Can Using Legal Software Help Improve Cash Flow?
In a world where time is money, automating as many tasks as possible is crucial when looking to save time while managing your law firm’s cash flow. Managing the cash flow of your law firm can be made simple by using technology.
Using remote legal software, such as GLS by GoodLaw, can automate processes like payments and invoicing, giving you more time to focus on developing your business. In addition, tracking your firm’s finances in real-time gives you greater visibility and control when making financial decisions, ultimately leading to an improved cash flow.
Final Thoughts
Cash flow is one of the most important aspects of any business and should be carefully monitored. In this article, we have looked at how you can effectively manage cash flow to ensure that your law firm remains afloat.
As a way to simplify the process and stay ahead of the curve, legal technology software can set your cash flow management apart from the rest, giving you an edge to create a more prosperous future for your law firm.
References
[1] GDP and events in history: how the COVID-19 pandemic shocked the UK economy www.ons.gov.uk – Office for National Statistics. (n.d.). [online] Available at:
[2] Consumer price inflation, UK – Office for National Statistics. www.ons.gov.uk. (2022). [online] Available at:
References
How Law Firms Can Manage Cash Flow :: Tri Counties Bank (tcbk.com)
The Keys to Managing Your Firm’s Cash Flow – Legl
10 Best Practices for Enhancing Your Law Firm’s Cash Flow (centerbase.com)
Cash flow planning for legal firms · Cash Flow Frog
7 Tips on Managing your Law Firm’s Cash Flow | Law Firm Suites
Law Firm Cash Flow: You Should Aim for 90 in 90 | LawPay
Cash flow management for law firms | LawFirmAmbition
How Law Firms Can Boost Cash Flow Amid Uncertain Times – Law Technology Today
Use Business Intelligence to Improve Cash Flow | BigHand
10 Ways of Increasing Your Law Firm’s Cash Flow – LawBillity (ebillity.com)
