Strategic Guidance for Managing Partners: Cash Management for Law Firms

Cash management involves the strategic handling of a Law Firm’s cash flows, ensuring that there is enough liquidity in the Firm to meet short-term obligations while maximizing the return on assets. For law firms, challenges often faced in managing cash are embedded in the nature of the business, one in which income streams are reliant upon efforts from hired professionals.  Law Firms have to pay employees up front while they typically allowing clients 60+ days to pay their bills (which may have been sent out 30 or more days after the employees gets paid).  As such, a partners’ invested capital is quickly consumed by working capital needs.  To then maintain a healthy cash reserve while also fronting expert witness and other case costs to clients only adds to the challenges of running the business.  Especially in these times of rising interest rates, here are a few cash management tips to help your Law Firm maximize its returns:

  1. Idle cash, invest it wisely – While it is comfortable to hold liquid cash reserves in your checking account, the cost of doing so has increased significantly from just a short time ago.  There are many accounts in which cash can remain liquid and accessible but still earn 5% or more.  Law firms need a clear plan to maximize the interest that can be earned on their money and limit the interest being paid out on their debt.  I’ll emphasize this recommendation, YOU NEED TO BE EARNING INTEREST ON YOUR CASH!
  2. Establish reserve policies – I’ve often recommended that law firms aim to keep two months of expenses in liquid assets as a healthy reserve.  In the last year and a half as interest rates have increased by 5%, that rule of thumb needs to be put into context.  If the money can be used better elsewhere to pay down firm debt, or distributed to partners to pay their own debt, it may be worth running on a thinner reserve. 
  3. Optimize billing and collections systems – One of my favorite quotes is “the more I practice, the luckier I get.” It’s hard to know exactly when clients are going to pay their bills but a reliable process over billing and collections will help you manage cash flow with a lot more predictability.  My previous posts can provide some tips to get started on improving the processes at your Law Firm.
  1. Manage your Accounts Payable differently – For the last decade, paying bills a week or a month early as a matter of convenience has been a perfectly reasonable policy.  With interest rates at 5%, holding onto that cash a little longer can really make a difference in a Firm’s effort to manage cash flow.  Firms should have a reliable “due date” tracking system for their general AP so they can pay bills close to their due dates.  Also, for advanced costs, Firms need to prioritize paying them upon collection from clients.  That may require a specific arrangement with the vendor but it can significantly improve cash flow (not to mention avoid some negative tax implications).
  2. Utilize a reliable cash flow forecast – Reliability of your collections and AP processes will produce the information needed for a strong 13-week cash flow.  This is your roadmap to cash flow management, giving you enough time to anticipate and successfully navigate issues that may be on the horizon.

To get the most out of these recommendations, your Law Firm should have a reliable budget.  See my previous posts with advice about how to prepare and monitor a budget that will help you manage your cash flow to maximize the return on your Law Firm’s assets.

Separate and apart from the fact that these are just good business habits, the above recommendations will help you to put your idle money to good use.  Earning 5% on your operating reserves would provide a very meaningful benefit for most Law Firms.  Or better yet if you are carrying adjustable rate debt, you can reduce the sting of rising interest rates by paying those amounts down with your extra cash.

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