Fundamentals of strong cash flow in law firms

In late 2011 I posted about why law firm cash so often dries up so quickly, and made the strong point that with law firm profit margins being so slim after proper principal's salaries, management must get the fundamentals right to avoid a crisis in availability of working capital.... Where does all the cash go? 3 December 2011

All too often I encounter law firms focussing only on the short term, after-the-event, aspects of cash flow management.

Typically they are engaged in a stressful juggling act, holding off payments as long as possible, chasing debtors, pursuing staff over bills that should have gone out, desperately anxious for funds to come in to get them through another week...

In the worst situations, managers have become despondent, and tend to blame many factors that may well be at play in a minor way, but are certainly not the root causes of the present cash flow problems...

In the most simplistic analysis, firms invest wages and associated costs, and all other overheads (including principals' reasonable base salaries), in a fairly simple operation to generate sufficient revenues to create a decent profit margin.

If they collect the revenues quickly enough, by billing at the earliest proper time and collecting promptly, they normally should not have a cash flow problem.

Around the edges there are ways a firm can use too much cash without a compensating injection of additional working capital, but those situations are usually not all that mysterious.

Where the problems start is right at the very beginning...in determining what amount of revenues should flow from the efforts of the people you have invested in...principals included.

Work backwards further...revenues will only come from work progressed to a point where you are entitled to bill, and get paid for, so cashflow is ultimately fundamentally dependant upon how much work you get done from the overheads invested in any given period...

This is where the 'fun" begins!

Most small-medium law firms do not organise to get enough work done...they set the goals too low, and all the surveys show that most firms then proceed to fail to achieve even those inappropriately low revenue targets...

The 'normal'  narrowness of the potential margins is thus pared down even further in the dim dark recesses of the firm where the basic rules are set, or not set, and the tightness of future cash is pre-destined by the behaviour of managers, usually principals.

Why does this happen?

In my experience it's because managers do not realise just how important it is...they pay lip-service to it. Even when they do try to get the numbers up they actually do not know how to go about it...their lack of people-management skills comes fully to the fore.

Often they console, or even pride, themselves with being "good bosses", pretty easy-going, and running an enjoyable firm to work in, little realising that this is in fact at the heart of all their cash flow problems.

There is insufficient balance between being a nice boss to work for and running a tight ship financially...

The reality is that it is perfectly possible to have staff working a full day for a full day's pay, without being an awful boss to work for...

Next time you have a cash flow crisis can I suggest by all means deal with the short term fixes first, but then move on to a deep and careful analysis of whether you really do have adequate margins built into your planning.

The most important area to look at is whether your staff who do legal work are, where appropriate, doing legal work for most of the hours each day that they are paid for. It's a myth that most fee-earners need large amounts of time each day to do other FirmTime things...only some people do!

Lawyers guilty about their profit

Friends, clients, and followers will fully appreciate that my passion is helping lawyers derive proper profits from their businesses...

After a recent blog post on the issue a couple of lawyers have approached me at social functions and wanted to chat about their theory of why lawyers have so much trouble with the issue of profit.

They both pushed the angle that many lawyers are actually embarrassed, or even feel guilty, about profiting from the labour of employees.

I have to say that my own experiences over 38 years as a lawyer lead me to concur.

Here's the conundrum in essence...

"Reasonable profit" is ok to most lawyers by definition, because it's reasonable!

It doesn't help us though because the problem is that most lawyers have no idea what "reasonable profit" means...

Well here's what it's not...the profit made in most small-medium law firms in Australasia ranges from non-existent to meagre...so we have some sort of a fence around one end of the paddock so to speak...

It's the other end that causes all the dramas...

Here's my take...most lawyers in Australasia are intrinsically egalitarian...to the extent that their management strategy is to position themselves as fellow employees of their staff...members of the same team.

It's a fairly understandable approach, and works well if you get it right (especially in team sport), but one that causes major dramas from a business perspective if you lose sight of some important fundamentals in the process.

The other employees do not own a business, with its required investments and risks, and the so-called "trade-off"...the potential for a proper profit...they can only sell their labour...as skilled as it may be!

As a principal, a lawyer buys the staff's labour to apply to the business plan, generate planned revenues, and create a margin over expenses. The principal's own labour is part of the resources purchased, for which a salary is paid or at least allotted.

The point of this exercise of being in a legal business is not to make a salary for the principals...that's very easy to obtain without all the fuss and hassle...

Cutting to the chase...one of the key reasons why many staff in law firms produce so little is that the principals are embarrassed to insist upon them doing a day's work for a day's pay...essentially because they can't look the staff in the eye knowing that if everyone on the team does a proper day's work the principals will earn a profit... Profit? "Out out damned word", to butcher Shakespeare!

Until more principals fully wake up to the monumental differences between being in business and being an employee, most small-medium law firms will continue to struggle to generate good margins, and struggle with cash flow issues, too much debt and stress, and too little fun!

Lawyers' Personal Productivity Tip

A couple of small "heads-up" today...

Voice recognition for activity capture...For all those of you smart enough to fully understand the value of tracking how you spend your valuable time...some practice management software now has options or add-ons of a voice recognition feature. This may well assist a lot of busy lawyers with fuller activity capture...

Voice recognition for your smart phone...Lawyers have been using software like DragonDictate for years...and perhaps not enough...despite the software getting better and better.

Now that there are cheap Apps for smart phones, voice recognition is a very practical tool for the right situations where other forms of communication are not as suitable...if at all...

In the car, waiting outside court, when you are in a meeting and need something done urgently...speak a short message to your phone...review the resulting text on screen and send it off...

There is a lot of technology around today for smart lawyers to utilise on a horses for courses basis...

Use technology thoughtfully...Always keep in mind that a lawyer's biggest asset is their brain...what's in it and how it works...just make sure you don't slow it down in a failed attempt to use technology to be effective...

If you get seriously into typing you are operating at the opposite end of the scale to where your brain should be being applied...

Drafting may well be a totally different process of course...remember those different horses and courses!

Practical Marketing for the small-medium law firm.…