Home Management Five Cash-Flow Strategies
For Solo and Small Law Firms
Five Cash-Flow Strategies For Solo and Small Law Firms

Five Cash-Flow Strategies
For Solo and Small Law Firms


Small law practices face the same challenges as large firms but have fewer resources on hand. Big firms can squander money and time on inefficient practices and remain competitive, but small practices have to run leaner and maintain a healthy cash flow. In an article in the South Florida Legal Guide, Dwight Hill notes that “…for the smaller firm, maximizing cash flow may be just as important to overall success or failure as a stellar courtroom record or a positive case-by-case disposition.” Here are five of the most important strategies small and solo law firms can use to maximize cash flow:


Know Where Your Money Is

Attorney Suzanne Meehle is a consultant for other attorneys, advising them how to run their practices. She says,

“You have to know what your cash flow is, every single day, or you could lose your firm…But we didn’t go to law school to become accountants, did we?”

You can’t make smart decisions without all the information, and yet a surprising number of attorneys have no idea what the firm’s financial situation is. In a large firm, the partners may justify this by saying it’s the accounting department’s job. If you’re a small firm, you still need an accountant. If you haven’t already got an accountant, try and find one that is local to your firm. For example, if you work in Melbourne, you’ll want to hire an Accounting firm Melbourne. This way, if you need to speak to your accountant about the company’s financial situation, they’re never far away! While the accountants may handle the bulk of the details, an attorney should still have at least a peripheral view of which clients are paying and which are not. In a small or solo firm, attorneys handle their own billing so it is even more important to have a clear and simple view of the practice’s finances.

An effective legal billing system gives you a 360-degree view of matter financials. It shouldn’t take you more than a minute or so for you to get a clear view of what amounts on each matter are unbilled, unpaid and late, and you should be able to see all retainer balances so you know which accounts need replenishment reminders. On a deeper level you should be able to generate reports such as three-way reconciliations at the click of a button. During an audit, you should be able to produce an audit trail that shows not only every financial transaction, but also who performed the transaction and when it was done.


Work On Retainer

Clients are often surprised by how much legal services cost but, desperate for the help, they will promise you the sun, the moon and their first born in order to retain your services. Unfortunately when the bill comes, clients find that all of their cash is tied up in other expenses and they can’t afford to pay their attorneys. Most experienced lawyers deal with this by getting an advanced retainer so the money is already there when they need it.

However retainers bring their own problems. In most states, you can’t deposit an advanced payment (aka unearned fees) into your operating account and start spending it. You have to put the funds in a trust account, withdrawing your payments only as you earn them. If the matter becomes more expensive than you had estimated, then you need to request additional funds to replenish the dwindling retainer. Finally you need to be sure to return any unspent retainer to the client when the case is over. Trust bookkeeping software for attorneys is a necessity, making it easy to track every penny of a matter’s retainer, issue reminders when the balance falls low, and to see how much of a retainer should be refunded to the client when a matter is closed. Since trust management is so deeply intertwined with general billing activities, it is preferable to have a single piece of software that performs both functions.


Bill As You Go

Not billing for hours or expenses is like throwing money away, and yet many firms do it. They don’t deliberately short themselves, of course, but the overworked solo attorney simply loses track of his workload and forgets to bill for those couple of hours put in on Tuesday, or that court fee he paid on Thursday. Many attorneys try to record their expenses at the end of the day, relying on memory or hastily scribbled notes to generate billing. A few attorneys go so far as to indulge in this exercise only weekly or even monthly. Unless you have an eidetic memory, you will inevitably forget a few entries here and there, crippling your income.

The best way to bill is to record hours or expenses the instant they occur. Not that long ago, the best attorneys could do was make careful entries in a notebook and hope to remember to record those in the legal billing program back at the office. Today, attorneys have access to cloud-based law practice management software that gives them access to their billing at all times. As long as you have an internet connection, you can update a client’s billing immediately no matter where you are so you know you will be producing comprehensive invoices.


Bill Promptly And Clearly

Obviously clients aren’t going to pay until you ask for the money, which is why you should send out invoices at the same time every month. However, you can’t simply send a client a bill for an $80,000 lump sum and expect it to be paid. The client is going to want to know what that money paid for. Itemized invoices are easy with legal time and billing software but it’s possible to overcomplicate an invoice. A cluttered and confusing bill is going to be put aside for future perusal, while a clean invoice is more likely to be paid promptly.

Small firms depend heavily on word-of-mouth referrals, so anything you can do to leave a client with a good impression will lead to future business. You try to present a professional image through everything from your behavior in court to the furnishings in your office. That professionalism should be extended to client correspondence, including your practice’s billing. High quality invoices produced by law firm billing software leave the client with a positive image of your firm, but they should also be customizable so you can make your own imprint on the form.


Follow Up On Late Accounts

A study from the Center for the Study of the Legal Profession at Georgetown Law reveals that law firms collect only about 84% of the fees they earn. That means roughly one dollar out of every six you charge will never be paid. That 16% overhead is devastating to a small law firm working on a shoestring budget. However, part of this problem is that law firms are reluctant to chase down late accounts. The personal relationship between client and attorney is so important to the process that many lawyers, especially solo practitioners, are afraid of the loss of future business.

Follow-up on aging accounts doesn’t have to be confrontational but it is a critical part of cash flow. Start with a simple reminder once an account is 30 days past due. These reminders can often be sent out in email batches with modern time and billing software. If nothing else, it’s important to remind the client of the debt — the “squeaky wheel” argument. It prevents the client from easily dismissing the debt.

As the debt gets older, it is probably worth at least one attempt at personal contact. Call the client and ask what is happening. The client may be struggling and has been too embarrassed to contact you. Again, you don’t have to be rude or aggressive. You may be able to work out a payment plan or a reduction in rate. You may even choose to write off the debt in the hope it will bring you future business from a grateful client, though you will probably want to insist on a retainer next time. Whatever you do, it should be a proactive choice not simply the default action of a law firm that doesn’t want to deal with old debt

You aren’t an accountant, but with modern billing software for lawyers you don’t have to be. And you may not be an accountant, but you are a small business owner. You have to deal with the annoying details of running your practice or you won’t have a practice to run. Focus on your cash flow and you will have the flexibility and resources you need to provide quality legal services far into the future.

Vector image courtesy of Freepick.

Rick Kabra on Linkedin
Rick Kabra
Rick Kabra
Dr. Rick Kabra is CEO of CosmoLex and has over 10 years of experience in the legal software industry catering to the specialized technology needs of small to mid-sized law firms. Rick has given numerous seminars and published articles on legal technologies such as law practice technology management, cloud computing, and legal billing & trust accounting compliance.


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