8 Strategies To Optimize Your Law Firm’s Cash Flow

Do you find that you have a consistent client list, great marketing, and a solid staff, but your firm just doesn’t seem to grow? If this is the case, it may be time to work with Consultance Accounting’s legal firm accounting specialists to take control of your cash flow. Here’s a closer look at some key strategies to help you get started.

The Basics of Law Firm Cash Flow

Cash flow is defined as the movement of money in and out of a company. So, any money your firm spends is considered outflow, and any money taken in is inflow. If you use cash accounting practices at your law firm, the formula for cash flow is simple:

Cash Flow = Net Income + Revenue – Total Expenses + Non-Cash Expenses – Owner Cash Draws

This formula gets a little more complicated for accrual accounting. With accrual accounting, you record income when you bill rather than when you get paid. Here is the formula for if you use accrual accounting:

Cash Flow = Net Income + Non-Cash Expenses – Net Increase in Working Capital

Cash flow is a quick way to assess the financial health of your law firm. Without consistent, rising cash flow, you may have trouble covering business expenses such as investing in your client base with activities like paid advertising.

Now that you know what cash flow is, how can you improve it?

Your first course of action should be to look at your billing process. Your goal should be to raise your collection rate and shorten the time spent collecting.

Implementing these eight strategies will help you focus on these outcomes.

  1. Create Goals: having defined goals gives you a measurable target to reach. Determine how many invoices you have out that are unpaid and determine the average percentage of invoices that are unpaid. If you typically have a 90% collection rate then create a goal to increase that in a specific amount of time. For example, in the next 90 days, I want to have 95% of my invoices collected.
  2. Be Diligent About Time Tracking: always record your time at the end of each task. Make a point to not put it off because you often forget what you did this morning by the afternoon. Do not leave billable hours on the table because you forgot to track them.
  3. Accept Online Payments: In this day and age, online payments are important to any business model. A survey of legal industry professionals found that those law firms that accept online payments are paid 39% faster than those who don’t.
  4. Invoice in a Timely Manner: timely invoices also get paid faster. Make sure that you give terms that provide faster cash flow, too.
  5. Automate Your Cash Flow: a great option for simplifying your billing process is by supporting recurring, automated payments. You can set this up in your onboarding paperwork to make this easier.
  6. Build a Clear Accounts Receivable Process: this process encompasses the actions taken to collect payment. This includes everything from the initial invoice to due-date notifications, past-due reminders, and payment confirmations. These actions are good reminders to motivate your clients to pay quickly (and hopefully on time).
  7. Let Your Tech Tools Work in Tandem: your case management, time tracking, billing, and payment collection tools can all work together to share information across platforms. This way, you won’t have to cut and paste data or have multiple programs and windows open to see a full picture of your law firm’s financial picture.
  8. Alleviate Your Security Burden: modern problems require modern solutions and new security protocols. It’s not safe to write down account numbers or credit card numbers. There are many solutions to these problems, like partnering with a payment provider that doesn’t require your firm to collect card data.

Take action to optimize your legal firm cash flow now.

If your legal firm’s cash flow hasn’t been managed closely, you might not even know there is a problem.
However, if you do notice a cash shortfall, make sure to start implementing the eight strategies above to achieve your goals: liquidating underused assets, applying for government assistance or securing a line of credit. If you need assistance, simply contact our team!

How Can We Help You?