What financial red flags should law firms look out for?
We all want financial security – and to keep our firm’s financial house in order.
After all, a law firm’s money troubles frequently lead to team stress, which can mean a lower quality service for clients. And stress can cause employees and partners to make poor decisions that worsen the situation or lead to professional repercussions.
It can also mean cost-cutting measures that result in lower quality work to keep the doors open.
It’s worth being on the lookout for financial red flags at your firm. And it’s worth knowing that red flags don’t mean you’ve failed in any way – but they are indicators that you need to make changes.
Having expenses that exceed your incoming cash
Most people understand that in order for a business to be successful – and yes, a law firm is a business – it needs to bring in more money than what goes out.
But what does that look like at a law firm? On a macro scale, it means your expenses shouldn’t be growing faster than your revenue. Problem indicators might be a reduction in revenue on a per partner or per attorney basis – or a decline in earnings.
Past due invoices
Speaking of earnings, you need to get paid. If you’re billing for less than 95% of hours worked or you’re collecting less than 97% of what you’re owed, these are signs of trouble.
And don’t let billable hours or accounts receivable languish. You should be billing time as it happens and sending invoices regularly.
Look at realization rate specifically – how much money you’re collecting out of what you’re billing. If this number is low you have a collections issue which is quickly going to turn into a cash flow issue.
Wracking up too much debt
Debt can be a necessary part of running a law firm, but don’t let it spiral out of control. If your debt is greater than your assets or if you haven’t been able to pay off a line of credit in over three months, then your debt has gotten too unwieldy and could soon start overshadowing firm decisions.
Identify red flags early, so that you can address problems while they’re still fixable. And know that some red flags, like billing, can be addressed with proper tool use.
Use a time-tracker that’s integrated with your billing and accounting systems for a more accurate reflection of hours worked. Likewise, batch billing and automated overdue reminders can help your firm stay on top of collections.
It’s human nature to want to avoid problems, but catching indicators of financial distress early can save your firm and its employees a lot of stress.