Cash flow shows the true picture of the financial health of a law firm. Poor cash flow management will make the firm struggle to stay afloat as it can’t pay bills, salaries, or, let alone invest.
Law firms had no choice but to adjust to the economic downturn because of the impacts of the pandemic, which significantly affected business flow. This may have resulted in firms worrying about maintaining a steady cash flow.
A LexisNexis survey reveals that 73% of more than 300 US law firms have past due accounts, while 45.6% revealed that the past due accounts were less likely to be paid. This means that if the firms don’t find a way to recover the unpaid bills, they may jeopardize their survival. It also affirms the reality on the ground that one primary reason for cash flow issues in law practices is money being tied up in unpaid bills and work in progress (WIP).
Fortunately, a law firm can take proactive steps to avoid running out of cash to manage operations efficiently and sufficiently.
- Analyze current cash flow
It’s essential to start by examining the status of cash flow in the firm. This is achieved by generating a cash flow projection which indicates how cash comes in and out of the firm. This can be done with the help of an accountant who can compile elements such as projected sales and projected costs.
A cash flow forecast will map out the slow seasons at the law firm. It requires accurately recording transactions and regular updating, such as every month, to obtain the actual financial position.
- Improve unpaid bill collection
The law firm should devise standard procedures in which they promptly follow up on undue client accounts. Assuming the staff are proactive in sending invoices in a timely fashion, the firm can send a formal reminder email if there’s no payment past the due date.
If no response is forthcoming, another way can be found, such as a face-to-face meeting with the client. All this needs to be done while maintaining a positive relationship with the client.
- Provide flexible payment plans
A firm can avoid piling up unpaid invoices by drawing up a written plan with the client on payments. The agreement should allow installments instead of paying the whole amount upfront. It should indicate the timing of payments, payment methods, and action to be taken for late payments. Automation allows the firm to link billing processes to the account receivable accounts to promote timely payments.
- Establish all payment methods
The firm needs to offer convenience and flexibility in payment of legal fees. A Fiserv survey reveals that 79% of customers have adopted paperless billing, while 70% prefer a biller with multiple payment methods. Having customer-friendly payment methods such as credit cards, cash, bank transfers, and online payments will improve the customer experience. It will also ensure the law firm can constantly maintain positive cash flow.
In addition, ethical laws such as the ABA Model Rules of Professional Conduct have a provision that allows credit cards to be used for payment. Providing online payments such as credit cards will improve the bottom line.
- Offer incentives for fast payments
This is a way to preserve cash flow while promoting customer service. Incentives such as giving discounts to clients that pay early have a better effect than imposing huge interest charges on late payments. Rewards will inspire customers to pay quickly and be loyal. Another way is to offer bonus services such as free webinars, which make the clients feel valued.
- Optimize technology for better cash flow
Artificial intelligence can reduce the time spent reviewing a contract by 20% to 90% without compromising accuracy, which is a significant time-saver. The right technology will greatly enhance the firm’s productivity, which translates to higher revenues.
A cloud-based system can be customized to automate routine tasks such as client intake, booking appointments, cash management, and expense tracking. With technology handling the bulk of administrative tasks, lawyers will focus more on billable work, which brings in the money.
- Negotiate with suppliers
Building a rapport with suppliers will help the firm survive through hard times. The supplier can agree to allow flexible payment plans, offer discounts, or extend a line of credit. This will help the firm sustain adequate cash flow moving forward.
- Review and reduce costs
Expenses such as rent, and salaries can take up the bulk of the practice’s budget. Taking a second look may expose gaps where money is being wasted, causing cash flow issues. One cost-cutting strategy is hiring more affordable service providers to reduce utilities. There’s also hiring remote legal workers to minimize staff costs. Reviewing the budget frequently will keep a check on spending and increase savings.
- Maintain a cash reserve
A cash reserve will come in handy during a cash flow crunch. Preferably, there needs to be at least three to six months’ savings to cover business expenses. The firm can avoid taking on credit card debt as a last resort. The cash reserve can be built by reviewing the projected cash flow and the budget.
- Set solid financial goals
Starting the year with clear goals will set the pace for the entire year. Goals will keep the firm in line through achieving its KPIs and maintaining the budget. It will be able to find areas that require improvement to promote cash flow. This eliminates the stress of safeguarding the stability of the firm.
Improving cash flow can be a grueling task but is necessary for the firm’s future. The best way is to take advantage of technology and work with a team to ensure the practice never lacks funds in times of crisis. Consistent planning will ensure the coming years will be manageable regardless of the changes in the economy.
However, your firm doesn’t have to go on the journey alone. LawBillity can help you save time and resources with our legal time management and billing software, which will improve your firm’s cash flow. Go ahead and sign up for the 14-day free trial.