is your cash flowing?

It's a feeling every Law Firm knows.

The wages need to be paid, that big debtor is taking their time to pay you, and the GST is due at the end of the month!

Sure, it's a temporary issue – but is there enough cash in the bank to pay for everything?

At its heart, cash flow management is simply a matter of making sure your firm has enough cash to meet expenses when they need to be paid.

Sounds easy, right?

For most firms', keeping track of expense and revenue items (each operating according to its own highly uncertain timetable), can be a difficult and stressful exercise.

Without cash flow, the firm struggles to pay debts and make a profit.

Managing cash flow and driving cash flow improvement is just as vital to a law firm as a clear revenue strategy. You cannot afford to ignore cash flow management.

the cash gap

There is a difference between profit and cash flow.

In this example, the time between the client agreeing to the engagement and receiving the cash is 105 days. However, the final profit is recorded 60 days after the cost agreement is signed. You have 60 days of expenses of which the majority are not on credit (e.g. wages, rent, interest, IT leasing).

The fundamental focus of any profit and cash flow plan is to ensure that the time between receiving the cash and signing the costs agreement is kept to a minimum.

You might think this is impossible, but it's not . . .

closing the cash gap

Many businesses successfully manage cash flow by bringing the gap between sale and cash receipt back to the bare minimum. Doing so means improved cash flow therefore closing the cash gap as shown below.

cash flow improvement formula

The cash flow improvement formula for a healthy law firm should aim to drive WIP and debtors down and maintain creditors at terms. This means surplus cash exists to make asset purchases, pay debts, and pay dividends and drawings to owners.

tips for improving cash flow in your business:

1. Plain English Cover Letter

   Your cost agreement is a legal document that is required under the Legal Practitioners Act. To drive cash flow improvement, you must make sure that your clients are clear on the following:

   • An estimate of what you will fee them
   • The timing of billing
   • The payment terms and methods
   
   
2. Initial Fee at Signing

   You should bill your clients at least 30% to 50% of your estimate at the time of signing the agreement. This means your terms of engagement are that you will bill an amount at the start. It will be payable by the client on the payment terms stipulated in your costs agreement.

3. Deposit Cash into Trust Account

   You will only be entitled to bank cash received into your general account if you have done the work. So when you receive your client money, deposit it into your trust account.

4. Minimum Weekly Trust Account Withdrawl

   Now that you have the cash in the trust account, review the WIP balances at least weekly to determine the extent of your cash withdrawals to your general account.

5. Minimum Weekly Debtor Follow Up

   Be ruthless about following up your outstanding debtors. The client has agreed to your terms in the cost agreement so hold them accountable to follow your payment rules.

Call Matt Schlyder on 07 3833 3999 to redeem your free Profit and Cash Flow Review, and reduce the Cash Gap in your firm today!