In 2023, clients paid law firms rates 6% higher than the previous year, Thomson Reuters reports. Yet, at the same time, firms found it harder to actually collect on those higher rates, while clients are also increasingly turning to cheaper firms in a bid to keep costs down. In light of this report, it’s more important than ever to look after the financial well-being of your small firm and find ways to protect against future uncertainties. By avoiding common financial mistakes like not keeping financial reports, poor cash flow management, and not having a contingency plan, you can better position your small firm to make smart decisions, take calculated risks, and protect your bottom line even during difficult financial times.
Not Keeping Financial Reports
You can’t make smart business decisions if you don’t have accurate data to base them off of. Market conditions — along with your firm’s financial status — can change fast, and you need to have access to real, current financial data in order to make strategic decisions that either improve your profits, or quickly guide you toward course correction. If, on the other hand, your financial reports are wrong, unfinished, or late, then you won’t have the data you need when you need it. This data includes your balance sheet report, monthly revenue report, profit and loss statement, cash flow statements and forecast, and work-in-progress reports.
Save Time, Improve Accuracy By Outsourcing
Yet, keeping up-to-date financial reports is admittedly time consuming. 80% of U.S. small law firms say the time they spend on this kind of admin poses at least a moderate challenge for their firm, the Illinois Supreme Court Commission on Professionalism reveals. Fortunately, it’s possible to outsource your bookkeeping and accounting responsibilities to professionals who can take care of your books for you, so you’re free to focus on what you do best: practicing law. “Without good financial and management reporting, you’re left with constant questions about the accuracy of your bookkeeping and the strategic decisions you need to make” explains Law Firm Velocity, specialists in law firm accounting and finance.
By receiving regular financial reports, including income statements, balance sheets, and management reports, you can get a clear and accessible picture of your firm’s financial standing. You’re then in the best position possible to make strong decisions that align with your firm’s immediate needs and long-term goals — whether you need to find ways to minimize unnecessary spending or give your profit margins a boost, for example.
Poor Cash Flow Management
Good cash flow management — the process of tracking money coming into and going out of your firm on a daily basis — can provide your firm with consistent access to cash, so you have what you need to sustain your operations. Yet, small firms can often experience cash flow issues due to either slow-paying clients or bad habits like overspending and poor billing practices. So, if this is you, proactively managing your cash flow can help you stay cash positive even during challenging times.
Boost Cash Flow With Better Billing Practices
One of the first steps toward healthy cash flow management involves converting your billable hours into cash as fast as possible. Lengthy cash flow conversions can be stressful and, not to mention, expensive. So, sending your invoices immediately upon work completion is essential to prevent payment delays. If you wait too long (30, 60, or even 90 days), the bill’s more likely to remain unpaid. Also, clearly outline all services rendered and corresponding fees in your invoices, so there’s no room for misunderstanding on the client’s end.
It’s also important to clarify fees with clients before starting work. Sometimes clients don’t expect the work to come to as much as it does, so are reluctant to pay the invoice once received. Being clear up front on fee structures avoids any misunderstanding, disputes, and slow payments.
No Contingency Plan
If cash flow management hasn’t been a priority, you may not realize you’re short on funds until bills are due — and there’s no cash to settle them. Not having a contingency plan leaves you unprepared for these sorts of unexpected financial challenges — whether it’s an unexpected bill, loss of a big client, or even a sudden drop in demand. A contingency plan should outline strategies to help your firm lower expenses and find sources of cash on short notice, so you’re better positioned to ride out and recover from financial challenges.
Steps To Include In Your Financial Contingency Plan
First off, review your outgoings to find where you can cut costs. Keeping expenses low is a challenge for 65% of law firms, Thomson Reuters reveals, but with some smart thinking, it can be done. For example, rent can take up a big chunk of your overhead expenses (usually between 9%-12% of overhead costs for most firms). So, see if you can negotiate lower rent with your landlord. If the location of your building works to build trust and respect with high-paying clients, moving locations may not really make sense profit-wise. But, negotiating a lower rent can help save money while you still benefit from the client-friendly location.
Selling assets you no longer need is also a smart way to generate fast cash, and should play a key role in your financial contingency plan. So, look over your financial accounts to see which assets you can most afford to liquidate. If you have any unused furniture or old equipment lying around, or even empty office space, you can sell them for extra cash.
You may also want to consider taking out a line of credit to help make ends meet. Shorter-term credit options can provide you with a financial lifeline while you’re waiting on slow-paying clients. A business line of credit, in particular, lets your firm borrow money, but you won’t need to pay interest on all of it — just on the amount you actually spend. And, the faster you pay it back, the less interest it’ll have incurred.
Smart money management is the backbone of any successful law firm. By avoiding common financial mistakes, you can successfully improve your firm’s financial health, weather challenging times, and enjoy long-term success.
