6 Strategies to Accelerate Law Firm Cash Flow
Lawyers, even those with a healthy caseload and many clients, might find themselves wondering why they’re struggling to turn a profit or keep the bills paid.
In a world of changing technology and client expectations, hard work and expert knowledge may not be enough to ensure a legal business stays financially healthy–especially in times of economic uncertainty.
Therefore, developing ongoing strategies to accelerate and maintain a healthy stream of law firm cash flow is essential to maintaining financial stability and growth.
In this article, we’ll take a deep dive into:
- The importance of cash flow management
- Common cash flow roadblocks
- Tips and best practices to increase cash flow
- How legal software is integral to boosting incoming payments
Why is Law Firm Cash Flow Management Important
Cash flow refers to money going in and out of your business during a given reporting period.
For lawyers, calculating cash flow gets a little tricky since you’re not necessarily paid when the work is done, but after the client pays the invoice. You also have to take into account operating expenses along with administrative work and other non-billable hours as part of your outflow.
That leads to one of the biggest misconceptions about law firm cash flow–that bringing in more work will automatically solve a negative cash flow problem. This isn’t necessarily true. You can have all the clients in the world, but at the end of the day, your cash flow will remain negative if they aren’t paying their bills.
In other words, there are usually other culprits at work other than caseload when cash flow is a struggle.
Why Law Firms Struggle with Cash Flow
The next question to ask is, “Why do law firms struggle with cash flow in the first place?” There are a multitude of reasons, and a lot of them can depend on your practice area, your location, and other unique factors.
Even so, there are some common cash flow challenges that many law firms face.
No Way to Enforce Spend Budgets
Creating a law firm budget is the first step to assessing and improving your business’s financial health. A budget allows you to estimate how much you can afford to spend in a given month. However, firm leaders may lack a holistic view of operating cash flow, which makes enforcing financial accountability nearly impossible. Additionally, it makes it harder to identify sources of revenue leakage.
Using Manual Processes to Track Cash Flow
Many law firms have been slow to adopt legal accounting, billing, and case management software. However, relying on manual processes can hurt your bottom line. Manual expense and hour tracking are both time-consuming and error-prone—leading to delays and less time spent on billable work.
Seasonal Revenue Fluctuations
In retail, demand forecasting refers to correlating sales data with outside factors to predict customer demand. Many practice areas also have seasonal shifts in demand and caseload, and failing to plan for those fluctuations can negatively impact cash flow.
Visibility is key here. Without historical data for caseload, client intake, and billing efficiency, it’s hard to get an honest view of your peak seasons.
Payment Collection Delays
Many lawyers find themselves working constantly and yet experiencing low revenue. A realization rate refers to the revenue you actually bill for and receive versus the billable hours you work. For example, if your firm logs 1,000 hours in one month and invoices 700 of those hours, your realization rate is 70%. Inefficient billing processes are often the main culprit for a low realization rate.
Regulations for Managing Trust Accounts
The need to separate operating and client trust accounts makes managing law firm budgets and finances even more complex. Commingling funds or withdrawing funds for billable work before clients are billed are huge ethical issues and may be subject to discipline or fines.
Additionally, staying on top of retainers and ensuring trust accounts are funded is another way to increase cash flow.
However, the complexity of managing these separate accounts can also slow down your access to much-needed cash. Manually tracking and reconciling your various accounts can create an unsteady cash flow.
How to Improve Law Firm Operating Cash Flow
When it comes to improving law firm cash flow management, there are a few key areas and processes to consider.
- Billing, invoicing, and spend management: Adopting modern billing, invoicing, and budget enforcement methods can significantly increase payment speed and catch sources of revenue leakage.
- Client intake and fee allocation: Providing prospects and new clients with flexible fee structures creates a more client-friendly experience from the start and helps you get paid faster.
- Visibility and reporting: Centralizing your firm’s financial data allows you to spot trends and opportunities to minimize expenses and optimize your resources.
But what do these areas look like in practice? Here are six practical ways your law firm can increase cash flow:
1. Audit Current Firm Cash Flow
The first step to improving cash flow is to understand how it looks currently. Case management and legal accounting software allows your firm to reconcile all financial data and get an honest look at your expenses, billing, and hours.
This is called a law firm cash flow statement and is used to calculate your firm’s bottom line–the overall change in your practice’s available cash over a given period.
2. Accept Online Payments
Slowdowns in payments are not always due to a client not having funds or not wanting to pay. If your practice relies on checks and manual payment methods that are largely unused by many of today’s legal consumers, it can naturally lead to friction and delays.
Adopt legal billing software to offer secure and modern payment methods for your clients. These include online payment portals, credit cards, and contactless payments (like tap to pay cards or Apple Pay). Firms that accept online payments get paid up to 39% faster, making it a very effective tactic for boosting billing efficiency.
3. Choose the Right Fee Model
Lawyers who only bill by the hour may find it harder to maintain a healthy cash flow. With clients demanding more online services and transparent costs, the traditional hourly rate billing model may not be the best fit for your legal business.
Offering fixed, value-based fee arrangements may be a better option for both you and your clients. This is done by calculating your average expenses and hours for a case and then setting a fixed price with a markup. This pricing model is more predictable for budgeting purposes and is increasingly popular with clients.
However, this model makes more sense for some practice areas than others. And you should still reserve the right to negotiate fees if a case is particularly complicated. Importantly, a fixed-fee model isn’t the only fee structure out there—so you should research your options to determine which billing model is the best fit for your practice and your target market.
Adopting a modern billing solution gives you the flexibility to experiment with different pricing models and see which ones work best for your business.
4. Offer Client Payment Plans
Many firms back themselves into a corner when they take an all-or-nothing approach to payment. Offering a flexible payment plan that allows clients to pay their balance over time allows you to boost cash flow while making your services accessible to more clients.
Getting paid partially and consistently is better than not getting paid at all. This is why over 60% of legal professionals offer payment plans to their clients. When you offer clients a way to make regular, small payments, you can count on a steadier revenue stream.
5. Create Financial Reports for Visibility
With a comprehensive view of your law firm’s financial health, you can use that data for custom reports. Financial reports allow you to correlate data and discover financial trends and client preferences that might otherwise go unnoticed. This, in turn, lets you make smarter, data-driven decisions about the future of your practice.
Here are a few common reports to get you started:
- Monthly revenue reports: How much revenue is your firm pulling in on a short-term basis? Are there any short or long-term trends in monthly earnings?
- Accounts receivable (A/R) tracking: How many outstanding bills does your firm have yet to collect? How much potential unrealized income is out there?
- Law firm cash flow statements: What was your bottom line within a given reporting period?
- Caseload pipeline reports: What does your firm’s caseload look like for the next few months? How much revenue are you forecasting?
- Productivity: How much time is being spent on billable hours and how much money are you losing on administrative and other non-billable tasks?
- Marketing performance: What marketing campaigns led to the most new clients and realized income? How much was spent on them?
Using reports to back up your decision-making will go a long way in helping you optimize your cash flow.
6. Use Spend Management Software
Many legal professionals use company credit cards, expense reports, and cash to handle expenses. Without a spend management tool to keep track of and limit expenses, lawyers may face unwanted financial surprises at the end of the month.
Using spend management software allows you to track expenses in real time, set spending limits per expense type, and automate parts of the process (such as receipt tracking) to save time. Overall, a spend management solution will help your law firm stay on budget and accurately bill for advanced costs.
Key Metrics for Assessing Law Firm Cash Flow
Key performance indicators (KPIs) are metrics that provide insight into whether your law firm is performing as expected or if you’ve gotten off track.
A few of the most common metrics that law firm leaders use to assess their performance and cash flow are:
- Client growth and acquisition rates
- Average fee per client
- Cost of client acquisition
- Monthly law firm revenue
- Collection rate
- Estimate of annual revenue
- Estimate of all operating expenses and overhead
- Utilization rate
- Realization rate
For more information on these metrics, read our article on law firm KPIs.
These are just a few of the items you can track using a comprehensive law firm management solution. One tip: make sure you use tools that can integrate with your accounting, time tracking, and billing software–the more data you have at your disposal, the better the insights.
How Software Solutions Improve Firm Cash Flow
It wasn’t long ago that law firms had limited technology options at their disposal. Now there are numerous software solutions that are legally compliant and tailored for the industry. Legal software solutions are helping legal professionals stay competitive and increase their growth like never before thanks to:
- Online billing and flexible payments
- Flexible fee structure support
- Time tracking
- Legal process automation
- Spending reports
- Comprehensive expense tracking
- Budget enforcement tools
While implementing new software can be daunting, the benefits far outweigh the risks. When looking for a legal software solution for your firm, make sure you find a solution that is both powerful and easy to use.
Improve Your Law Firm Cash Flow with MyCase
By gaining visibility into your finances, optimizing your billing processes, and implementing spend management, your firm will be well on its way to financial success.
Thousands of law firms across the country rely on MyCase’s leading case management and billing software to improve client experiences, increase cash flow, and boost efficiency. With comprehensive expense tracking tools, billing process automation, and online payment features, you can increase your firm’s realization rate and cash flow like never before.
To learn more about how MyCase can optimize your law firm’s cash flow, schedule a free demo today.
