These Win/Win Tips Will Keep Your Firm's Cash Flowing

By Edward Poll
Reprinted from the September/October 2001 issue of Legal Management, The Journal of The Association of Legal Administrators.

By Edward Poll

Two tasks that are fundamental for law firm executive director/administrator success: managing people and managing money. Managing people fosters harmony and efficiency within the organization.

Managing money keeps the office operating and keeps the people paid.

Cash flow (or lack thereof) in most law firms acts as a barometer. And, in competitive times, cash-flow management is not only an art, it is an essential for the very survival of the firm. A cash-flow problem is, in many cases, only the result in a long chain of events that administrators can prevent with appropriate foresight.

What follows are some business practices that administrators - and the lawyers they work for - can adopt to stay out of serious cash-flow trouble.

  • Write a business plan.
    In order to delineate your goals, you must have a business plan. If you already have a plan, review and update it. This plan is an important step to your future growth. The business plan sets the path for attaining firm objectives. Think of it this way: You want to travel by car from Los Angeles to Denver. You look at the map and see many alternative routes. The map is your guide and it will help you find the most direct and efficient path. That is what a business plan does for your firm.

  • Develop a cash-flow statement.
    The cash-flow statement can have many names: a cash-flow budget, a statement of cash or a forecast. Whatever the moniker, this statement is important for review on at least a weekly, if not daily, basis. It is the single most important tool for the success of any business activity.

  • Reduce variable expenses.
    Many office expense items cannot be controlled or reduced once set in place. However, some expenses, such as rent, can be modified given the right circumstances. It is possible to negotiate a reduction of the rent schedule with your landlord.

    Other savings items include library expenditures (you can share a library or use your county law library), payroll (to a more limited extent if a sole practitioner), and dues and subscriptions. Savings in these three areas alone can be substantial in many cases. Further, if you know when to anticipate low-and high-cash-flow periods, you can postpone, advance or finance equipment purchases.

  • Increase your hourly rate.
    If your firm increases its billing rate a little at a time, you won't shock your clients with a big adjustment. You can raise rates until you are at least at the "market" level - the rate your competitors charge.

  • Consider flat-fee billing as opposed to hourly billing.
    With flat-fee billing, you can deposit the entire fee into the general account upon receipt.

  • Change your billing cycle.
    Bill one-fourth of the alphabet each week. In this manner, you will receive money from clients on a regular basis - probably weekly, rather than once per month.

  • Shorten your billing cycle.
    If you remain on a monthly billing cycle, be sure your clients receive statements on or before the first day of the following month. To do this, your billing cycle must end on or about the 25th of the month. The theory is that most people pay their bills on or about the first of the month. If a statement reaches the client after this time, the statement is normally placed in the pile of bills to be paid the following cycle. That means a delay for payment for as much as 75 days: the first 30 days you are doing the work; the second 30 days is the missed payment cycle; then it takes at least 15 days for the client to make out the check, ma it, and for the mail to deliver the check to you. If the client delays payment even further, the time extends beyond. 75 days. Thus, anything you can do t shorten the cycle will be that much better for you.

  • Send statements after a particularly beneficial psychological event.
    If you bill when clients are happy -even if somewhat before or beyond the normal billing date -- they're more likely to pay quickly For example, after you have won a motion in court, prepared draft of an important contract with which your client is pleased, or closed the negotiation on a deal that favors your client send a billing of services rendered to date.

    This will place the client on the pea of the "client satisfaction curve," the time of least resistance for payment of fees. Later, the client will invariably forget how important you were in the process of the result and wonder why the bill is so high. Once in that state of mind, the statement for services will sit unpaid until some future date.

  • "Age" your accounts receivable once a week.
    An aging is an important piece (information in the management (your practice. Do not ignore client who do not pay in accordance wit their agreement. Time passes quick] when you are busily engaged in practicing law, advocating clients' interest You tend to forget that one client owes you money while you are working on other clients' matters.

    Forgetting or ignoring "old" client results in forgetting or ignoring the accounts receivable. This results in the failure to collect your money. Thus, it important to be reminded frequently. On one hand, you will be able to pursue collection with the regular, week reminders that money is owed to you On the other hand, you will be able to thank a client you talk to who has recently sent in payment on account. Such courtesies go a long way to maintaining good client relations.

  • Stop work!
    If, based on the aging information, you are aware that a client is delinquent in the payment of fees, stop further work for that client. Go to the beach, spend more time with the family, expand your marketing efforts for new clients. Under no circumstances, should you do any further work for the client.

    Before stopping work, however, be sure the client knows that you will do no further work until payment is made. If the matter involves litigation, make the appropriate motion before the court to be relieved. Not only will you most likely be paid, but you will also see a better attitude in your client toward your efforts on his or her behalf. The client will know that you are serious, that you protect your own interests, and, therefore, will do all in your power to protect the interests of your client.

  • Hire someone to help collect.
    If you are having little success collecting your accounts receivable, or if you believe that the working attorney or administrator (you) should not be the person collecting the bills, then hire someone (e.g., a part-time accounts- receivable clerk from a local college or a retired bookkeeper) to do only this task. The cost of the person will be less than the money received.

  • Maintain a high average daily balance.
    Most banks calculate the "average daily balance" in your bank account. This is one of the most significant bits of information with which a bank works in analyzing a loan request. Thus, you want to maintain as high a balance as possible. This can be done either by keeping a large sum of money in the bank or by keeping limited funds in the account for a longer period of time.

    You can keep funds in the account longer by depositing revenue immediately upon receipt and spreading the payment of bills throughout the month. Do not pay your bills all at one time: This will cause an exaggerated dip in your account balance rather than provide an even flow of funds.

  • Don't wait to deposit checks.
    It's the first rule of cash flow management: Do not accumulate checks for deposit until the end of the week. While the check is "cooling its heels" in your desk drawer, too many catastrophic events might occur. The client may, in the interim, become angry, for whatever reason, and stop payment on the check. The check may reach your client's bank at a time when the account is overdrawn. The client may have been named as a defendant in a lawsuit for which attachment procedures are available. Because of this, the client's bank account may be "marked" for a sum is large enough to cause the presentation of the check you are holding to be rejected.

    In each of these cases, and many others that you can imagine, had the check been deposited immediately upon receipt, the check most probably would have cleared the client's bank and credited to your account.

  • Be sure that you sign all checks.
    Do not delegate this authority. You must know the present status of your "business" at all times.

  • Consider an automatic bank sweep.
    Banks provide for an "automatic sweep" on a daily basis. Establish a minimum amount of money, such as $2,500, to remain in your general account. The exact sum depends on the amount of checks and deposits that pass through your bank account each month. Then, instruct the bank to segregate all funds in excess of this amount at the end of each day and "sweep" or transfer those "excess" funds into a money market (interest bearing) account until needed.

    Likewise, the bank can be instructed to automatically transfer funds into the general account from the money market account in the event the balance goes below the established minimum amount.

    The better approach, however, is to request the bank to call you on any day during which the balance of your account goes below the minimum amount established by you. This latter approach, as contrasted with the automatic sweep into the money market account, forces the one responsible for these activities to know rather than guess the status of the cash balances at every given moment.

  • Make bank deposits personally until you get to know the bank personnel.
    Get to know the branch manager where you bank. Know the loan committee personnel. Know the operations personnel. These are the people who can help you the most when you have a need at the bank. Only when you are on good terms with the bank personnel should you bank by mail or allow someone else in your office to make deposits.

  • Negotiate immediate access to deposits.
    Some banks place a "hold" on funds deposited with them until the funds have cleared through the banking system. This may be as long as seven days. However, you can negotiate with the bank so that you have immediate access to your deposited funds.

  • Use remittance envelopes.
    Pre-addressed and stamped return envelopes mailed with your statements will help. This saves clients time and effort in mailing your payments and, frequently, saves at least one day in your receiving payments.

  • Deposit all checks from clients
    Deposit all checks - even if the amount received does not match the amount due per the statement. Make a photocopy of the check. After making the deposit, call the client. After you have played "telephone tag" for several days, ask the client to explain the difference. You will ultimately reconcile the amount paid with the amount due; however, in the meantime, you will have deposit- ed the amount sent to you and continue to receive the benefits of that deposit.

  • Charge for the time of paralegals and legal assistants.
    The American Bar Association defines legal assistants this way: "...a person, qualified through education, training, or work experience, who is employed or retained by a lawyer, law office, governmental agency, or other entity in a capacity of function which involves the performance, under the ultimate direction and supervision of an attorney, or specifically delegated substantive legal work, which work, for the most part, requires a sufficient knowledge of legal concepts that, absent such assistant, the attorney would perform the task." The charge is not for secretarial work, but for creative, legal work such as meeting with clients, meeting with court personnel, deposition summaries, drafting pleadings, contracts, investigations and generally assuring that dead- lines are set and met.

  • Know when to say no.
    Lawyers get into financial and other difficulties with clients in two common situations:
    • They take on a client that has already used two or three other attorneys on the same matter. There is a reason why the first two lawyers are no longer around, and that reason usually is that the client's expectations far exceeded the reality of the probable result.

    • The client refuses to take your advice, and you do not believe the suggested course of conduct is appropriate or that it will be successful. In either case, it's time to fire the client. Of course, place the "no" or "firing" in writing and then withdraw. You will save your- self lost fees, heartache and - most importantly - time that would have otherwise been expended without real hope of being compensated.

    • Remind your attorneys that the law is a profession.
      Even though your firm is a professional organization, it is also a business. You are running an organization that must act in a business-like manner. Law firm administrators and managers are ultimately responsible, along with the management committee of the firm, for efficient firm operations. You must take those steps and preventive measures appropriate to accomplish this goal. And, coincidentally, these efforts usually result in the more effective delivery of legal services by the firm.

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