Cash Flow: Introduction
One of the most important lessons in business is this: cash is life. It doesn’t matter if you are running an ice cream parlor, building military aircraft or operating a legal practice. You can have millions of dollars in net worth and yet have to file for bankruptcy because you don’t have any cash to pay your bills. I want to share some important tips for maintaining cash flow that I’ve seen used by our most successful clients, but first we need to deal with some basic concepts like defining what cash is, and showing you how to use your legal billing program to keep an eye on it.
Why Does Cash Matter?
The obvious answer is cash lets you pay your bills, but there is more to it than that. Cash gives you options. If your cash flow is poor then every penny that comes in goes to pay an outstanding expense and you never have the opportunity to expand or change. However when you have a healthy cash flow, you can build up a reserve that lets you survive slow work periods, hire staff that lets you handle more work, or take advantages of changes in the industry. When two law firms are in competition, the one with a better cash flow will probably come out on top.
What Is Cash?
Many businesses mistake assets for cash. A common problem in non-service businesses is to have all their money tied up in inventory. If the inventory doesn’t sell then they have no cash to pay their expenses. Law offices don’t deal in inventory but they do deal in accounts receivable, and that is where many attorneys make a mistake. They assume that a billable hours is cash, but it’s really the law practice version of inventory.
You put in hours on a case; that’s not cash while it’s sitting unbilled in your law office management software. So you send an invoice, but that’s still not cash. Only when your client pays the invoice and you can deposit money in your operating — not your trust — account can you consider that amount cash.
Do You Know Your Cash Flow?
It’s not enough to have cash; you also have to know what your balances are. You should be able to get a financial overview of your practice every day. Although metrics like billable hours incurred in the previous month are valuable, the most important numbers you want to see are your balances: operating account, trust account, unbilled invoice and unpaid invoice. Those numbers give you a good idea what your cash is now and what it is likely to be in the near future.
CosmoLex’s dashboard feature gives you that information on one screen. Start every day by visiting your dashboard and looking for problems. The sooner you respond to a situation, the steadier your cash flow will be.
Over the next few weeks we will look at methods you can use in your legal practice to improve and stabilize your cash flow right now. All of these methods are supported by features you’ll find in CosmoLex legal billing software. Come back to this blog to find out more.