Improve Law Firm Cash Flow – Small Law Firms
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.
1) There are seven steps that can substantially improve cash flow at your law firm to explore what you need to do, watch this short 4 minute video: The Seven Steps to Cash Flow Improvement for Smaller Law Firms
2) If poor cash flow is affecting your enjoyment of practicing law and you want to do something about it today, then why not consider our inexpensive program Cash Flow Improvement for Smaller Law Firms. This easy program will give you the tools to quickly and painlessly improve your law firm cash flow. The link to the program is ” Cash Flow Improvement for Smaller Law Firms“