Cash flow is the lubricant that enables all businesses to function. When you take too much money out of the organization, you will have a cash flow challenge. Only a supermarket or an organization like Amazon.com can function with losses, as such high-volume retailers get great long-term payment terms from their suppliers and receive cash immediately on making a sale.
A law firm, obviously, is different. At many firms, lawyers get accustomed to comfortable lifestyles and are unwilling to fund the organization due to a sense of their own personal entitlement.
That flies in the face of basic cash flow management, because all organizations, large and small, have a second thing in common beyond cash flow: the three categories of expenditures for which cash flow is used. They are:
- non-discretionary (mandatory) spending that is required by current obligations and by law — debt repayment, insurance, Social Security and federal income tax payments;
- adjustable spending that is important but can be modified (such as lease terms and staffing); and
- discretionary spending that could be eliminated if necessary.
What's unique to law firms is the impact so many individuals have directly on discretionary spending and thus on cash flow.
In many law firms, individual partners can direct discretionary resource consumption. That may involve anything from purchasing new office furniture to charging the firm with personal meals and travel to making a commitment for a firm-sponsored table at a charity dinner.
Cash flow is not just a financial metric. It is, in a very real sense, a moral responsibility that in a law firm involves the notion of ownership. An owner — meaning a partner in the firm — should be the last person to receive financial benefit from the firm. Staff and associates come first. Vendors and suppliers come next, then owners.
The owners of the firm should lay awake at night wondering how to improve the firm's efficiency and growth and profitability.
This concept of ownership and the ownership responsibility is the only way to build the firm as a cohesive unit, getting away from the broken model in which firms are only silos of sole practitioners under a loose organizational umbrella. Such attorneys think (often correctly, unfortunately) that they can jump ship and continue their flagrant conduct at another firm.
Lowering the lawyers' compensation to appropriate levels and controlling or eliminating individually directed discretionary spending, in accordance with the revenue and expenses of the firm, and keeping debt only for long-term purchases (not for lawyers' draws or pet projects) is the only formula to protect cash flow and keep a law firm vibrant and afloat.
An ownership mentality that supports an emotional commitment to the success of the firm can lead directly to the ideas of value billing and client service.
That can be an antidote to simply focusing on billable hours and ignoring the worth of what each person does. It takes the law firm out of the realm of industries like autos and banking, where churning out cars and mortgages without regard to value and worth led to excesses, collapse and layoffs.
It makes a law firm truly professional.