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Expert Strategies to Reverse a Law Firm’s Cash Flow Slump
Cash flow forms the backbone of the financial condition of every law firm. It is imperative to have a positive cash flow in order to strive for business growth and profitability. This is only possible when a business is able to manage its law firm accounting efficiently, and more importantly, in a timely manner. So, let’s get started and hear it from the industry experts about the various cash flow challenges and ways to overcome them.
Top Cashflow Challenges and Solutions
1. Assess the paying ability of the client
CEO at Lean-case
In times of cash flow slumps, asking customers to pay upfront will help you improve the cash flow. If you collect anything less than your full fee in advance, you’re basically extending credit to your clients. But you’re in the law business, not the credit business. You’re assuming a lot of risks – but you’re not charging interest rates as the credit card companies.
And if a client needs credit, they can use their credit card or go to a bank. You should actively screen clients and not take problem clients. It may seem painful first, but if you pass no-pay or slow-pay clients, you will have more time for finding good ones.
2. Categorize case based on billable volume & complexity
Personal Injury Lawyer at Hipsking & McAninch, LLC
In personal injury, the game is way different. It can take years before we see any return on a case, so the key is not getting too high or too low. Big case comes in? Great, but know that even once it settles that you will need to sustain off that money for a while. The variance is higher in personal injury cases than in family law, so the firm has to keep a good handle on any settlement or judgment that comes in.
I have seen some firms falter when they just hand out big bonuses every time a case settles. We have a quarterly bonus structure that has served us well and allows us to keep our cash flow positive. In four years, we have never needed a line of credit, and that is something we pride ourselves on.
3. Monitor, renegotiate, and communicate
Founder of CFO Perspective
Buy All the Time You Can Time is precious when cash is low. You want to foresee the cash crunch as soon as possible then stretch out the time you need to use cash for as long as you can. It may mean incurring penalties or late fees on some payments to make other critical payments. Challenge every cash outflow to see if there is any way to delay payment.
Closely monitor your cash: Your low cash balances are a major source of stress, and you may be tempted to ignore watching your cash to reduce this pain. That’s a major mistake that only makes the problem worse.
If you are tight on cash, you need to update your projection every week and calculate your cash flows for each week for the next month or three months. Early in my career, I was a financial analyst for a company that declared bankruptcy. That company updated a cash flow projection every week.
Renegotiate payment terms: You won’t be negotiating from a position of strength, but you may be able to negotiate for payments to be smaller or later. Be completely honest and show how reducing payments now may allow you to survive a short-term cash flow problem and increase the chances for full payment in the future.
Keep communicating with your lenders: When I worked at banks, one of the biggest mistakes made by borrowers who missed payments was not communicating. If you’ve missed payments, it’s clear to you and the lender that there is a problem.
The lender wants to work with you to find a solution to get paid, and that’s usually by working with you rather than working against you. Stopping communication leaves them with no option but to assume the worse and begin legal collection and foreclosure procedures.
4. Manage marketing expenditures proficiently
Owner of Everest Legal Marketing
In order to keep the coffers filled during lean times, law firms should adopt a flexible strategy in regards to marketing expenses. Try to make sure that your advertising contracts don’t run any longer than 3 – 6 months and invest in media that can easily be turned up or down quickly.
Google AdWords, Yelp, and many other platforms offer month-to-month or budget based advertising which allows you to be flexible or frugal during a downturn. As a goal, if cash flow goes down, you should be able to reduce marketing expenditures by at least 50-75% within 30 days.
5. Collect Payment Upfront
Founder & President at Cornerstone Support
As the owner of a debt-collection licensing firm, I can relate to the cash flow slump and speak to it. A cash flow slump really is a result of not collecting a retainer upfront. Think about it like this – not collecting upfront or when payment is due is like extending a line of credit to your customers. You aren’t a credit card company, so don’t act like one. Yes, it may be difficult to cash flow in the time being, but it will pay off in the long run.
6. Eliminate unnecessary expenses & coll
Jamie E.Wright, ESQ
Lawyer at Jade Umbrella
Skip the unnecessary expenses: Whether it is wining and dining a client or attending that annual conference for the fifth year in a row, law firms should eliminate unnecessary expenditures that do not necessarily yield a return on their investment and produce new clients.
Defer executive compensation: Partnership bonuses or salaries are generally large sums of cash that law firms shell out each year. Consider including deferment language in your partnership agreements so your firm leadership can truly lead by helping the firm stay afloat as opposed to cashing in.
Get the money upfront: Many firms handle a wide variety of contingency cases. But, where ethics and compassion allow, consider requesting that your clients invest in their litigation by requesting a deposit for costs and fees that can be billed against for your services and the costs of litigation.
7. Incorporate the use of technology
Program Director at ePay Legal
According to our legal trend analysis administrative tasks, generating & sending bill, configuring technology & collections are all tasks that, combined, eat away that could otherwise be spent on billable tasks. The fact that so much non-billable time is dedicated to business development(33%) suggests earning new clients is a constant concern for most law firms.
According to our survey, 59% of law firms regularly deal with late payments. The most common reason for clients not paying their bills is that they lack the funds to pay the bill all at once(44%). The firm also says 31% late payments are late even when clients have adequate funds.
It’s also worth noting that 25% of firms still mail bills, and 29% rely on clients to pay bills by check, both of which create a higher barrier to payment than faster, more convenient electronic methods.
Based on Clio payment data, we see that when collecting fees via a secure online credit card payment platform, firms then get paid 39 % faster by others means. It’s worth noticing that reducing the number of unpaid bills also has a dramatic effect on the average amount collected per matter.
8. Don’t leave any stone unturned to keep cash flow moving
CEO at Joseph P. McClelland, LLC
Some cases take years, and you only get paid at the end if you win like personal injury cases. If you are in a cash crunch, taking on a long term and/or big case like this will speed up your demise. You have to get your cash flow back with fees upfront services with hourly rates, so you can get to work earning those fees.
Take on smaller cases that you used to pass up: All cases fall in a hierarchy of case values. As you grow your firm, you often stop taking certain types of cases for a variety of reasons. When your cash flow stalls, you may need to revisit these decisions if they are cash-flow friendly. Don’t let your ego get in the way. This is temporary.
You reduce your price to close deals: This takes a fine touch to figure out in a consultation if you need to drop your fees to get them to sign. But it works. You are in a service industry no matter how much student debt you’ve taken on to get here. The positive point here is that this can be used by raising your fees on the fly in future consultations and utilizing a variation of this same skill.
You take payment plans: Many people can’t pay even a reduced amount for your legal fees. Choosing a payment plan is not fun as it causes more admin work, but it works. However, don’t always expect to get those last few payments, though. Many times the case ends before the payment plan. This will put you in a tough place to get paid, so try to think about this before you set the payment plan.
Push cases harder: Each case has its own speed, but you may need to focus more effort to move the case along. This is what long hours are all about because your other cases will still need the same amount of work.
9. Focus on less obvious accounting solutions
Board of Advisors/Financial Expert at Wealthy Living Today
Cash flow is a function of three ingredients: revenue, costs, and timing. Increase revenue or speed it up; cut costs or slow payments down. These are the obvious accounting solutions. Read below for the less obvious ones. The reality is that law firms are considered to be relatively recession-resistant, but it’s a far stretch to say they are recession-proof.
Remember, recessions can morph into depressions, but in any event can last for years. The first instinct in tight cash flow situations is to cut your associate pool – and even let some partners go. Push the fees per hour to the limit is another. However, this is easier said than done.
Many lawyers embroiled in the 2009 economic crisis will tell you they had no fun trying to survive. As a result, law firms today are already operating, especially lean people wise, based on that experience and dealing with companies ready to cut overheads at the drop of a hat.
There’s little to no latitude left to raise fees, and not much space to reduce HR, that’s for sure. The common-sense approach is a shift away from growth economy deals to focus instead on litigation, insolvency, bankruptcy, Chapter 7 and Chapter 11, workouts, administration, restructuring, refinancing, and so on. If you, as a bread-and-butter law firm, are feeling the cash flow pinch, you are probably approaching a recessionary trend.
The nature of your business calls on you to follow the money, and in bad times the money is still there but in different places. Diversity is the name of the game, and the more diverse you are, the better you can survive. Some of the most successful law firms take an innovative approach.
They give clients fewer discounts by motivating their partners and associates to expand their resources and services for the same fees charged. Instead of cutting fees, go the extra mile and do whatever has to be done to show clients you offer value for money. In this way, you uphold revenue without accelerating costs. Adjust and adapt on the one hand, and be the best at what you choose to do on the other.
The strategy is to encourage everyone in the firm to expand and enhance their capabilities. Motivate them to push their talents to the cutting-edge of clients’ expectations and don’t be shy about promoting it. If there’s going to be any investment, channel it into technology and business development – especially online.
There’s an array of digital apps geared to optimizing legal entity decisions, using predictive data analytics, and exposing revelations in all corners of the legal arena. ALSP is a recent viable diversification opportunity used by 50% of large law firms today, and a potential money-spinner.
By maximizing the employment of paralegals, embrace activities like e-discovery, legal research, litigation & investigation support, document review/coding, and non-legal/factual research. Clients are incentivized to stay with your firm during tough times, knowing that these vital extra services are within easy reach With all said and done above, manage your firm based on sound principles applicable to any business.
Build on existing relationships and spread the word on what you are doing technologically and resource-wise to be better than the competition. Promote yourself in the recession sensitive areas where you have small or no position currently so that companies are aware of your new services. Above all, plan now for the inevitable slowdown. Don’t wait for it to topple you over.
10. Timely payment reminder & hourly billing
Corporate Associate at Holland & Hart LLP
First, it is important to establish payment deadlines with all clients and let them know your deadlines in advance of beginning work for them, send your invoices on a timely basis, and then remind them of the deadlines a week or two in advance.
These reminders can be automated if needed. Also, make it as easy as possible for them to pay – make sure to include information about how to wire the money to you in the invoices and reminders, and check with your clients as to the easiest method for them to pay and make every effort to accommodate that.
The next thing that is crucial is, if you are billing on an hourly basis, make sure that all hours are getting put in on a timely basis so that each invoice that goes out to a client includes all hours during that period.
This is not only good for managing cash flow, but it is also good for client relations. Clients hate getting billed months late for five hours of work that was entered into the system late – that will be a lot harder to collect than a timely invoice. If you have multiple lawyers in your firm, you should have a clearly articulated rule and incentive or disincentive to make sure that attorneys keep up with their time. Attorneys are notoriously terrible at doing this.
For example, you could have a rule that no attorneys may be more than five days behind in putting in their hours, and their bonuses/raises in a certain year should be tied to not getting more than five days behind more than, say, three times in a year. Alternately, you could pay a small bonus at the end of the year to everyone who never got more than five days behind.
One additional point if you are a transactional attorney is that the best time to get paid is at or prior to the closing of a transaction (or at worst a few days after). After closing, it will be a lot harder to collect. Make every effort to have all hours up-to-date at the time of closing and, if there is fund flow, see if payment of your fees can be inserted as part of fund flow.
If you do the type of work where your fees are paid out of the proceeds of a transaction (say, lenders counsel in a debt financing or bankruptcy counsel paid from the proceeds of the estate) If you are at the point of cash flow problem, but you have unpaid invoices, one option to consider is invoice financing or invoice factoring.
This is where a financial institution makes a loan to you on the basis of your unpaid receivables, and either takes a security interest in those receivables (in the case of invoice financing) or actually takes an assignment of those receivables (in the case of invoice factoring).
Your loan will be a percentage of the receivables (which will depend on many factors, such as how overdue the invoice is, the creditworthiness of the debtor, etc), so you will be giving up a small percentage of those receivables in order to get the funds now instead of when the invoice is due.
Also, you will have to pay an additional flat fee. In the case of invoice factoring, since the receivables are assigned to the financial institution, it is the financial institution that collects the invoice so you would involve a third party in the relationship between you and your client.
You will want to look into the methods by which the financial institution does its collections. In the case of invoice financing, you will have to pay the financial institution the full amount of the invoice at the time of its receipt.
Most of what I mentioned above applies to lawyers billing by the hour. If you work on a contingency basis, cash flow slumps are a lot harder to avoid (unless you say Boies, Schiller Flexner), but one option you could look into is litigation financing in which a financial institution (not involved in the suit) provides capital to a plaintiff involved in litigation in return for a portion of any financial recovery from the lawsuit.
The plaintiff, in turn, can use the funds to pay the lawyers. This is something you need to discuss with your client since it involves them, and it is also something that may not be available for all types of lawsuits.
With the above-mentioned expert opinions, law firms can surely tackle cash flow challenges by addressing them with the best possible solutions. However, when it comes to accounting for law firms, owners need to understand that it is not a one-time affair as consistent efforts need to be put in place when it comes to managing the accounts receivable and payable process, eventually leading to positive cash flow.
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