Improve Law Firm Cash Flow – Small Legal Practices
If you want to improve law firm cash flow in your practice, then you need to make it something that you focus on and develop a Key Performance Indicator ( KPI) to measure it.
What you focus on get’s managed.
Of course you can’t really focus on it if you don’t have a way of measuring it.
When you think about it, your cash flow is locked up in your practice in either Debtors or Work in Progress (WIP). So it stands to reason that if you want to improve your cash flow, then you would want to reduce the amount that you have locked up in both Debtors and WIP.
Accountants typically call the total of debtors and WIP, Lockup, so that is the term that I will use here.
Your focus then, if you want to improve cash flow, should be on reducing your lockup as much as you can and thereby freeing up as much cash as you can in your practice.
I find the best way to think about your lockup is in terms of the number of days of fees that you have locked up, rather than just a dollar figure.
This makes it much easier to compare your results from year to year, partner to partner or indeed practice to practice.
Let me explain.
If you record time, then by adding your WIP balance and debtor balance, you will get your lock up.
If you divide this figure by your expected revenue for the year and
multiply by 365, this will express this lock up figure as a number of days of fees.
In other words, the length of time it takes from accepting an instruction from a client to collecting payment for the work.
Let’s use an example:
Say your expected fees for the year are $1,000,000
Work in Progress $250,000
Lock up $400,000
Days of Lockup $400K/$1mill X 365 = 146 days
In this example we are saying that on average it is taking 146 days (or nearly 5 months) for a matter to work through the practice from initial instruction to getting paid.
Clearly the lower this number the better.
The numbers vary enormously between professional practices. I
have seen practices with up to 365 days locked up in Debtors and WIP.
Yes, a whole year locked up in debtors and WIP.
So now you have an easy KPI to measure on a regular basis to see how you are controlling your cash flow.
If you want further help with how to improve law firm cash flow, why not look at our new online program “Cash Flow Improvement for Smaller Law Firms” To go to the page “Click Here“. On the page you will see a 4 minute video that explains the “Seven steps to cash flow improvement at your law firm“. You can also navigate to the page by clicking on the “Shop” tab at the top of the page and you will see the program there.