Keys to Effective Cash Flow Management
Every business has to generate cash to survive, whether you run a Fortune 500 company or a shaved ice stand—or a law practice. Most businesses pay expenses well in advance of delivering services and then invoicing the client. Accounting for the time lag between cash going out and cash coming in requires careful planning and attention. But cash flow management in a law firm can be particularly challenging.
Assume the following facts:
- Your firm accumulates time on a matter for 60 days before the project is delivered and invoiced to your client.
- Your client then remits payment, but only after another 60 days have passed.
- Your project and overhead payables are due every 30 days, and you pay your employees on a semi-monthly basis.
In this scenario, you have paid four months of expenses between the matter’s inception and collection! In prosperous times, this time lag is masked by volume (robbing Peter to pay Paul), but in tough economic conditions, this cash flow scenario can kill your practice.
Tips for Closing the Gap
Because it is much easier to change your internal processes than it is to get your clients to pay faster, here are a few ideas for closing that cash flow gap from an invoicing perspective.
- Bill regularly. Your best opportunity to collect is when your service is fresh in the mind of your client. Billing quickly and regularly will improve collections and lessen the risk of unknowingly providing additional services to a client who is unwilling or unable to pay.
- Fix any problems with the system. Flowcharting your service delivery and invoicing processes will allow you to identify inefficiencies and bottlenecks. Eliminating unnecessary steps in the process can shorten the collections cycle by days, weeks or even months.
- Set a monthly goal for sending invoices and hold yourself and others accountable for meeting that goal. We close each billing cycle on the last Saturday of the month and require that customer invoices be mailed by the following Wednesday. Meeting this deadline is the top priority in our firm, even in the busiest of times.
- Review invoice formatting. Does the invoice clearly state when payment is due and who to contact for questions? Make sure the requisite details are obvious.
Steps to Improve Collections
When it comes to collections, regular contact and follow-up is vitally important. If payment is due within 30 days, don’t wait 90 days or more to call. Collections issues do not age well, and so it is best to handle these matters while they are current. Here are a few thoughts on how to improve the collections that come from firms who have honed their processes.
- Develop a collections process and put someone in charge. The steps should be well-defined and documented. Know what you will do first, second and third when the check doesn’t arrive on the due date.
- Consider extra measures for larger bills or slow-paying customers. Consider calling to confirm receipt of the invoice and to review any questions. And then calling again several days before the invoice due date to again handle any questions and, more importantly, gain clarity on whether timely collection will be a problem.
- If you have doubts about a client’s ability to pay, take action. Think of your business as the bank. Would you loan this client money? If not, it may be time to revise payment terms. Securing a retainer or increasing the size of a retainer before beginning additional work is one way to limit your exposure.
Refining your billing and collections procedures is essential to maintaining or improving the financial health of your practice. Implementing some or all of these strategies will have an immediate impact on your business’s cash position.
Michael Baker is Managing Partner at Dent, Baker & Company, LLP, an accounting consultancy based in Birmingham, Alabama. A CPA and Certified Financial Planner, Michael’s practice is concentrated in the area of taxation and general business consulting. He is a member of the American Institute of Certified Public Accountants, the Alabama Society of Certified Public Accountants and the Financial Planning Association. He is also Chairman of the University of Alabama Birmingham Accounting and Finance Advisory Board and the Brock School of Business Dean’s Advisory Board at Samford University.