It is vitally important to remember that a law firm is a business and like any business needs to make a profit to be sustainable. Even the most talented lawyers can have trouble maintaining a profitable firm if they don’t understand cash flow and how a business works. The following items are not extremely complex, however they can do wonders to improve on the business side of a law practice.
1. Stay on top of your WIP
Every day that you delay getting your bills out the door decreases the likelihood that you will get paid. Although having a regular billing date makes a lot of sense, it may be worthwhile to look at more progressive billing. Clients will not respond negatively towards receiving a bill at significant milestones in the legal process. Being clear about those milestones from the beginning increases the speed of payment and helps clients see the value that you are providing.
2. A receivable is not the same thing as cash
Getting a bill out the door is not the end of the collection process. Although getting bills out in a timely manner significantly increase chances of getting paid, there are other measures that can be taken to improve realization. Consider incentivizing early payment. Similar to terms used in other industries, it can make sense to offer a small discount, maybe 2% for payment within 10 days. Set up a system to allow clients to pay by credit card or EFT. Lastly, it may be worthwhile to offer a one-time deep discount to severely overdue client receivables. Finally, don’t lose contact with a client after a bill is sent. Maintaining contact and sending reminders at regular intervals will help you turn those receivables from a number on the financial statement to real money.
3. Hire part-time employees or consider outsourcing certain tasks
Hiring a full-time employee can be a large undertaking for any business; this is especially true if you’re a small firm. Many people make the mistake of believing an employee costs what you pay them in salary, this is a long way from the truth. In reality, you need to factor in the benefits package, their office space, payroll taxes, the equipment they will use, and the time you will need to spend managing this person. In addition, you always need to be ensuring that you have enough work and income to justify having this person come to work each day. It may not make sense in every circumstance, however there are many tasks where hiring part-time employees or outsourcing altogether can take a lot of these factors off the table and keep a lot more money in your pocket.
4. Alternative fee arrangements
Competition among law firms and especially from on-line providers makes it necessary to rethink where and when alternative fee arrangements may make sense. Flat fee arrangements don’t always make sense, but there are certainly instances when it does. Cases where a process or type of case is very similar from client to client it can make a lot of sense to lay out clearly what the cost is and what the client will be receiving and then work to improve efficiency internally and therefore increase your margins.
5. Understand your costs
This may sound like a common sense item, and it really is, however that does not mean that it is always done. Periodically take the time to figure out where your money is going and whether that’s really where it needs to go. Making a budget and comparing it with your actually expenses can go a long way towards controlling costs and reducing unnecessary expenses. Figuring out which costs are recurring vs one-time or fixed vs variable is essential for any meaningful cash projection.