Managing Cash Flow for Your Law Practice
During these uncertain economic times, just about every business must deal with cash flow challenges. While unique in structure and mission, a law practice is, at its heart, a business venture like any other, and must concern itself with the very same operational issues and strategies. Law schools are very good at teaching techniques for mounting a successful case, along with excellent analytical skills, but when it comes to the “tricks of the trade” for managing the business side of a law practice, there may be more to learn after the degree has been awarded.
Maintaining cash flow may not be a significant problem for firms that have vast financial resources, a CFO and an accounting department. However, for the smaller firm, maximizing cash flow may be just as important to overall success or failure as a stellar courtroom record or a positive case-by-case disposition. A common lament of independent attorneys and small firms goes something like this, “I’m killing myself and my team to generate billable hours each month, so why we are barely breaking even, let alone showing any significant profit for all of that hard work?” It may seem basic, but having billable time in a given month doesn’t really account for very much if those bills are not collected.
So how, then, can small firms improve cash flow and ensure that financial rewards keep closer pace with workflow? The answer lies in developing a cash flow management strategy.
Cash Flow Management
In the most basic sense, cash flow management means taking all the phases of your workflow, and turning them into cash. The first phase is “production,” or the work in process (WIP). The second phase is billing for the WIP. And, the final phase is collecting for the time that has already been billed.
Most attorneys have little or no problem with Phase 1. In fact, they believe that the more billable hours they create, the less cash flow problems they will encounter. Law firms get into trouble, however, by focusing on the first step at the expense of giving serious time and effort to improving cash flow in Phases 2 and 3.
You may be surprised to find that many firms consistently “hold back” on sending out bills for billable time. In fact, in order to improve cash flow, rapid and accurate billing is clearly essential. Firms concerned about cash flow should review all unbilled time and make certain that all files have been properly billed. Another important part of the “Phase 2” strategy is to reevaluate the kinds of clients you take on, and reduce the number of files that traditionally go unbilled.
In Phase 3, firms must do everything possible to collect on receivables. Many attorneys do not like to get involved in collections, leaving the task to staff or third parties. However, the attorney has the best chance of collecting on an invoice, as clients are far more likely to respond to calls from their attorneys. This is especially true in the case of billing during ongoing litigation, when the clients would fear that a call regarding an unpaid bill could adversely affect the outcome of their case.
Financing and Other Options
Even when using the best cash flow strategies, small firms can still find themselves falling short on their monthly operating costs. Cash flow issues also affect more than just your ability to meet expenses. Without positive cash flow, it can be very difficult for small firms to expand or to add people. Also, when it comes to taxes, firms can be taxed on so-called “phantom income,” because they may be spending money on non-deductible expenses such as client costs.
One solution to these issues is to obtain a short-term loan or a line of credit; there are many lending products that are tailored to smaller law firms. In fact, one of the many advantages of working with a regional or local bank is the degree to which financial products can be customized and goal-directed. We, at Sabadell, understand the unique needs and cash flow issues of your firm.
A “cash flow loan” means applying for working capital, as opposed to borrowing to purchase a fixed asset such as new equipment. This is often called gap financing, because it is designed to cover the “gap” of the 60 – 90 days until receivables come due.
Another type of financing is “contingency financing,” where you apply for credit based on pending contingency litigation. Such credit is more difficult to obtain. For financing based on contingency work, expect your lender to want detailed information on specific contingency cases. The bank will likely also want to take a close look your track record in winning such contingencies.
Either way, when requesting financing, be prepared to share all of your financial records with your banker. In most cases, the lender will require personal guaranties or other backing. You should be prepared to give your bank a lien on your firm’s assets, and it is not uncommon for a bank to require life insurance and some security outside of the practice itself. If you are applying for financing to add staff, or otherwise expand the firm, be prepared to explain to the bank why now is the time to do so, and how you intend to repay the loan.
The Bottom Line
Developing and maintaining a good cash flow strategy, and understanding how to use and not abuse credit lines, are all key factors in maximizing your cash flow. However, the bottom line on your bottom line also has a lot to do with always being conscious of the costs of doing business.
Each month, there are expenses that will remain constant. That means some basic budgeting is in order; it is critical to make sure your firm has enough liquidity on the days that on-going payments come due. This kind of budgeting and management can best be accomplished by taking control of cash flow. Implementation of a cash flow management strategy will inevitably boost your firm’s long-term success.
Dwight Hill is executive vice president, Sabadell United Bank. Hill can be reached at 1111 Brickell Avenue, 30th Floor, Miami, FL 33131 (305) 812-7245 www.sabadellbank.com
South Florida Legal Guide 2013 Financial Edition