Law Practice Management Asked and Answered Blog
Category: Law firm cash flow
Jan 29, 2013
I am sole owner of a law firm in Western Kentucky. My practice consists of myself, a legal assistant, a part-time bookkeeper, and a part-time contract attorney. The practice is limited to employment law – both plaintiff and defense side. Approximately 80% of my business is contingency fee and 20% is time-billed and or retainer. While the practice has done okay over the past fifteen or so years worrying about paying bills (cash flow) is a constant source of stress for me and my family. I do no marketing – all of my business comes from lawyer referrals. Do you have any suggestions?
Cash flow has always been a challenge for contingency fee practices. However, times are getting harder. For personal injury plaintiff firms insurance companies are refusing to settle cases, stretching out timelines for settling cases that they do settle, paying less, and becoming even harder to deal with. Other contingency fee practices are also facing similar challenges and everyone is finding it harder to find adequate lines of credit. Many firms that were once 100% contingency fee practices are looking for ways to improve cash flow implementing different fee arrangements or by adding non-contingency fee practice areas.
I suggest that you evaluate ways that you might re-balance your case portfolio to say 60% contingency/time-bill mix. You might consider:
- Billing and collecting up front for all client costs even if the fee is contingent.
- Flat fee paid up front for a certain segment or phase of work – then contingency fees for the rest of the work.
- Actively marketing and targeting certain small business firms, establishing relationship, and seeking out defense employment work billed on a time-bill basis.
- Adding a different practice area that would not be billed on a contingency fee basis.
- Bring in a another attorney with a book of business in a complimentary non-contingency fee practice area.
Review your case pipeline report and your work habits to insure that you are putting the right effort and mix into the cases that you have so that when your time bill matters come up for billing at the end of the month – all can be billed.
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John W. Olmstead, MBA, Ph.D, CMC
Oct 05, 2011
Our five lawyer firm has had a very successful past couple of years. We have been growing in terms of clients, billings and revenues. However, we are getting deeper into our credit line and we simply don't have adequate cash to pay our bills. I would appreciate your thoughts on this matter.
Sounds like you are caught in the growth-cash flow trap. Growth puts strain on cash and increases demand for additional working capital. There have been many law firms and small businesses that were profitable – but failed due to simply running out of cash. While you cannot escape this paradox – by actively managing your cash flow (timing of the intake of cash against the outflow of expenses) you can minimize the impact of the following traps:
- Lack of Attention Paid to Financial Management. Many law firms, especially solos, often give this task a low priority on their to do list. Servicing clients and new client development are given higher priorities. There is often a lack of understanding of financial reports and statements. Understanding financial reports such as income statements v.s. cash flow statements are important is providing early detection of potential cash problems requiring corrective actions. Law firms should develop reasonable monthly, quarterly, and annual cash flow projections as well as income and expense projections.
- Poorly Managed Accounts Receivable. Cash is king. Law firms need to improve client payment terms and cash collections by speeding up billing cycle, getting more upfront through initial retainers, requiring retainer replenishments, and staying on top of retainers. Use your billing software reports to review retainer useage weekly, if not daily. Billing and accounting software should be implement any potential delinquent accounts and someone in the firm, or outside of the firm, should be responsible for prompt follow-up to collect all outstanding invoices. Depending on the resources available, a law firm may decide to out-source accounts receivable management and collections to industry professionals and specialists.
- Heavy Investment in Client Advances. Many law firms have large investments in client advances. For firms that book these expenditures as an asset – these items will not be reflected on an income statement as expenses. Be aware of their impact upon cash flow and look for ways have the client pay these directly, and bill sooner with cost only out-of-cycle invoices. Contingency fee firms will have to cover with additional working capital or line of credit.
- Paying Invoices too Quickly. Another way of improving cash flow is to slow down the outflow of cash by insuring that payables are not paid until they are due. I find many firms simply pay invoices when the invoice comes in the door – way before they are due. Monitor payment terms and pay when due.
Law Firms often experience these top cash flow problems when they do not manage the store and practively manage their income, receivables, and payables. Many are left wondering how they went out of business while their clients and revenues were growing substantially.
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John W. Olmstead, MBA, Ph.D, CMC