Cash flow is the crux of the matter. Lawyers, independent or in law firms, are just as concerned by this central problem. Especially since, very often, they have an ambiguous relationship with money. This sometimes creates situations of tension on a cash flow already undermined by the various crises experienced recently: strikes in defense of the retirement system, yellow vest movement, astonishment linked to the pandemic then closure of courts and now economic uncertainty created by the war in Ukraine.
Fortunately, there are good practices to boost the firm's cash flow and thus protect against insomnia or periods of slowdown in activity.
1. Manage your cash flow
Knowing at any time what the firm's cash flow level is constitutes the basis for any prior action on the subject.
The first step is to regularly check the available funds in your bank account:
– If you only have one account, check the balance online or from your mobile app
– If you have several bank accounts, use an aggregator like Bankin (it’s free) which will allow you to see at a glance the total available on all of your accounts
The second step is to anticipate your expenses and expected income for the next three months. Create an Excel spreadsheet where you can enter your income on one hand and your expenses on the other, to then calculate your available balance each month. Click here to download the template we're providing for free. Here are a few tips for filling out this spreadsheet.
– Prioritize recurring expenses and income such as rent, various subscriptions, monthly payments (insurance, service contracts, bank charges, etc.)…
– Then enter the expected amounts in descending order to avoid forgetting which would have a strong impact on the final result
This work needs to be done consistently over time. Therefore, it's important to ensure this spreadsheet is updated regularly by setting aside a one-hour slot every week (same day and same time) to keep it active and useful. Add it to your Outlook calendar to make sure you don't forget.
You now have a tool that allows you to anticipate and take preventive actions to avoid finding yourself in a delicate situation. It's time to move on to the initiatives you can take to boost your cash flow.
2. Cash out sooner
For reasons that are still unclear (we have been supporting thousands of lawyers for almost 10 years), lawyers often feel uncomfortable when billing their clients or when talking to them about money. It's a shame because this often places them in a complicated financial situation that they generate themselves!
This is all the more regrettable because the longer they wait to invoice their clients, the more the bill increases and the more embarrassing the situation becomes for the lawyer. In short, it's the snake that bites its own tail! Fortunately, there are simple solutions that the lawyer can quickly implement.
These are the well-known retainer invoices . They allow the lawyer to collect a substantial portion of the amount they will bill for the case. A golden rule dictates that the lawyer should always ask their client to pay the retainer invoice before taking any action on their behalf. Establishing this rule from the outset will not pose any problems. On the contrary, the client will appreciate the honesty and clarity of the approach. Conversely, receiving an invoice unexpectedly is always more delicate. It can lead to time spent on explanations and justifications.
Invoice your clients even before you start working for them: this fosters a strong relationship and creates a more relaxed working environment. Using software like Jarvis Legal simplifies the creation and sending of retainer invoices, as well as the drafting of customized fee agreements with the client's contact information.
3. Invoice your customers regularly
As the case progresses, the lawyer enters time and incurs costs on behalf of his client. It is counterproductive to wait too long to bill it, for the reasons already mentioned above. It is preferable to invoice your client regularly, which allows you to maintain a permanent and constructive dialogue. In fact, it is an opportunity to keep him informed of the progress of his file and to answer any questions he may have. If there is a pitfall, it is dealt with as soon as it appears, which facilitates its rapid resolution.
There are mainly three effective billing methods within law firms:
– Pay as you go billing
– Invoicing at the end of the month
– Billing upon reaching a level
To do this, lawyers need an up-to-date view of their cases, client by client, to know when and to whom to bill. Software like Jarvis Legal offers this type of functionality, allowing lawyers to generate invoices for multiple clients in just a few seconds. Invoices are then personalized and printed on the firm's letterhead. They can be sent directly by email, with a read receipt to facilitate tracking by the responsible lawyer.
4. Shorten payment terms
Invoicing your customers regularly allows you to trigger the payment deadline sooner and collect the amounts to be collected more quickly. Depending on its activity and the type of its clientele, a law firm will grant variable payment deadlines. You must therefore be able to identify them in order to follow them precisely and trigger reminders in a timely manner (see below).
The payment deadline will have a strong impact on cash flow. Indeed, between the moment when the service is “produced” by the lawyer and the moment when the latter is paid, the Working Capital Requirement (WCR) must be financed. That is to say the expenses linked to the proper functioning of the firm to produce the service promised to clients. The later the firm invoices, the later it will collect, the longer the period to be financed (and therefore the WCR) will be and therefore more expensive. Another perverse effect, poorly understood, the BFR can lead the lawyer to think that he must charge more, risking further straining the relationship with his clients on this subject and slowing down his commercial development.
The cash flow level therefore depends on the good timing between invoicing and collections. If these are slow to arrive, you must then move on to the next step: recovery.
5. Follow up with your customers as soon as they notice a delay
As we have said, it is essential to invoice your customers on time. It is just as essential to follow up with bad payers. It is therefore strongly recommended for a law firm to set up a recovery process that offers several levels of recovery. Indeed, not all customers necessarily have bad intentions when the time comes to pay the bill but they delay doing so.
They may have simply forgotten. There may be a technical or administrative problem or even an exceptional unforeseen event. It is then not necessary to be too aggressive in its recovery. On the contrary, being patient and understanding will strengthen customer relationships.
Conversely, chronic late payers must be identified to anticipate and adapt the invoicing process on the one hand, and the debt collection process on the other. Here too, turnkey solutions exist, such as Jarvis Legal, which displays an aging report for each client. This report is constantly updated and can be exported to provide a current list of clients and invoices concerned, enabling follow-up with the relevant clients.
It is essential that the lawyer does his part and takes charge of the subject because he is too often embarrassed to call or follow up with his clients on this sensitive subject. It should be noted that time is against him: the longer the situation drags on, the more complicated it will be to resolve.
6. Act quickly and efficiently in the event of cash flow difficulties
Thanks to the cash flow monitoring table presented at the beginning of this article, you have the ability to anticipate. As soon as you identify a future difficulty that could lead to a more complicated period that is likely to last, quickly make the necessary decisions.
To do this, from the list of expenses indicated in the cash flow statement, identify those which present an uncertain return on investment (ROI), which is too distant or those expenses which have no value in the eyes of your customers. This concerns your offices, operating costs, equipment as well as service providers or transport costs for example.
You will be able to re-incur these expenses when you have exited the phase of turbulence and the cash flow has returned to a satisfactory level.
7. Have a reserve to deal with unforeseen circumstances
The periods we have been going through for several years have demonstrated that no scenario, however highly improbable, should be ignored. Your cash flow must allow you to deal with unforeseen events and give you time to adapt.
Ideally, you should have 4 to 6 months of cash available. How to define this threshold? It's simple: it represents the amount of expenses to be assumed over this period, assuming that there will be no more turnover over this same period. So if you have monthly expenses of €5, the target cash flow level should be between €000 and €20 thousand to benefit from a sufficient reserve.
You can also ask your bank for an overdraft facility or overdraft authorization. Calculated in proportion to your turnover, it generally represents 15 days of turnover. This is the period during which you will be authorized to be overdrawn within the limit of the authorized amount. Be careful, however: this solution is quite expensive and you will have to become positive again within the 15-day period allowed.
Once the cash reserve has been established, it is recommended to optimize the surplus so as not to let money sit unnecessarily. Whether personally or for your employees, there are very interesting and particularly attractive solutions, such as the offers offered by Swisslife or AXA (additional income to supplement a future retirement, participation plan, contributions, etc.).
Cash flow is a highly strategic subject, both for businesses and law firms. Like the battery in your laptop or smartphone, you always need to have a reserve to face the unexpected. As we have seen here, many levers are at your disposal to take the initiative on this subject and not suffer. Now it's your turn.
To go further on this subject, download the cash flow monitoring table that we provide free of charge and do not hesitate to make an appointment with a business manager to find out more about Jarvis Legal.