Improve your firm’s cash flow management and set your practice up for growth.
Cash flow is the lifeblood of every law firm. So it’s important to evaluate cash flow in terms of its impact on your firm, both positive and negative. Understanding the ins and outs of your cash flow is critical to the future growth.
Here are seven tips that will help you to better manage your firm’s cash and put you on the path towards growth.
1. Evaluate Current Cash Flow
A positive cash flow doesn’t happen by chance. Start the process by preparing a cash flow forecast.
One tip is to use the 13-week rolling cash flow forecast. This forecast will highlight the slow periods or seasonal trends within your practice. Keeping timely and accurate accounting records for your firm allows you to build a forecast based on historical results.
Firms of all sizes should map out their cash flow. Solo or small firms that do not have accounting staff should use on an outsourced agency to provide ongoing accounting support and financial analysis.
2. Payment Plans and Late Fees
Payment plans are more effective when you have a concrete plan, in writing, to present to the client, instead of asking how much they can pay and when. Try breaking the fee into no more than three payments over the course of 60 days. It gives them more flexibility to pay, and you’re more likely to get paid in full before a substantial amount of work is done.
But even with payment plans, some customers will fall behind on their payments. Have a plan to actively manage your accounts receivable and communicate regularly with these customers. Sending invoices electronically is the fastest delivery.
But in addition to sending the regular invoices and checking in, you might want to include late fees, that are written out in the payment plan agreement that you had already discussed with your client. This can work as an extra motivator to encourage on-time payments.
3. Set-up Automatic Payments
Getting customers to pay by credit card, especially for recurring fees, is a great way to ensure timely payments. There are plenty of secure sites for businesses to use, and you can even set it up to have the funds transfer directly to your bank account. Consider offering these customers a small discount if they pay early. Your customer’s ability to pay in a variety of ways will also make it easier for them to pay early.
4. Have a Cash Reserve
To save some money saved for a rainy day, be sure to look at your cash flow forecast as well as how you budget spending. This is a reasonable goal to set and will help in any seasonal or down-trend months. It is probably good to have enough cash reserved to cover all of your business expenses for three months, and then update that reserve as your expenses change.
5. Develop Key Performance Indicators (KPIs) for Cash Flow
By using measurable ways to determine success, KPI benchmarks will help to ensure your practice is on the right path.
An example KPI could be tracking the average days outstanding in Accounts Receivable in which continued improvement over time will increase cash flows of the business.
As you plan for 2018 and beyond, adopt the old adage “cash is king” and make understanding and improving your cash flow a priority. Your firm will run better, and you’ll have greater peace of mind with a plan for the future.