Strategies to Enhance Cash Flow

Part Two of a Two-Part Article

Managing partners, financial partners, members of executive committees and administrators must devote more of their time today, than in the past, to planning and managing their firms' finances and those functions that improve the cash flow. Part One of this article described the first three of six aspects of law firm management and economics that the author has recommended to assist them in improving their firm's cash flow: 1) cash flow; 2) a business plan; 3) budgets for revenues, expenses and client advances. Part Two examines the remaining aspects: 4) partner compensation; 5) a recommended new business and billing committee; and 6) partners' capital and borrowing.

Good cash flow requires management and financial controls, two disciplines that operate as limitations on the independent actions of attorneys in group practice.

Attorneys realize that they must submit to systems and controls to manage the financial aspects of their practices in order to survive in the ever-increasing competitive environment that has engulfed them. Nevertheless, the introduction and implementation of these systems and controls by lawyer management do not engender “love” from their partners. On the other hand, careful financial management will bring rewards in terms of improved operating results and avoidance of unhappy or even painful surprises.

4. Compensation. Your compensation system should provide, and if it doesn't, you should consider it, recognition of lawyers who are prompt in billing and collecting. We recommend this be accomplished through the judgmental portion of your profit distribution system. Of course, certain types of legal business do not lend themselves to monthly billing ' ie, probate administration, contingent fee litigation, certain financings, etc. However, in that case you should recognize the time value of money in setting hourly rates and fees.

Old accounts, unbilled and billed, should be written off, not necessarily off the books, but for the purpose of determining current compensation. Some firms do this with respect to all accounts over one year old.

5. New Business and Billing Committee. In the old days, each partner made his or her own decision whether or not to take on a particular piece of business. Unfortunately, the growth of the business and the eagerness to take on new business, have led to billing and collection problems. My response has been the creation of a New Business and Billing Committee that serves several purposes:

No new client matter (for a new or an existing client) can be accepted without prior approval of the committee. This committee should meet weekly. Any committee member may approve new matters that cannot wait for committee approval. The committee checks the conflict of interest questionnaire, client credit information, applicable hourly rates and billing arrangements proposed by the responsible attorney.

The committee also reviews every invoice in excess of certain amount to audit the amount to be billed versus previously approved or agreed upon billing arrangements and applicable rates. Most lawyers have found this committee to be most helpful in ferreting out clients or matters which should be not acceptable, or only on the basis of a significant up-front retainer. I need not mention the benefits of the conflict of interest review. Finally, it is expected that the review of invoices will produce noticeable results in increasing your firm's realization of established billing rates and avoid discounting of time or rates.

It is a fact of life that most lawyers tend to be tough in evaluating business prospects, have more courage in billing top rates, and do a better job in advising clients of our billing practice ahead of time, if we have to account currently to a committee of peers.

6. Partners' Capital and Borrowings. For years, most firms have followed an arbitrary rule of thumb which calls for partners' capital to equal approximately 60% of the firm's investments in fixed assets, such as office equipment, leasehold improvements, etc. Partners add to capital each year and receive interest on this capital account at the average prime rate.

In addition I frequently recommend the firm withhold 5% of the annual net income and distribute same at the beginning of the second quarter of their next fiscal year.

Cash flow from operations, partners' capital, and the five percent hold back enables many firms to limit their bank borrowings to cover short-term needs.

Cash balances should be monitored carefully to maximize return on cash. Most cash should be invested to the extent that firms sometimes have to borrow money short-term. Partners should be on fixed monthly draws that may be supplemented with partial distributions on June 1 and September 1, cash flow permitting, however, partners' draws should be on the conservative side.

In conclusion, I want to emphasize that systems and controls do not give you results in and of themselves. It is the quality of legal services, marketed in a common sense way, rendered to clients, that produces the psychic and monetary rewards that lawyers seek.

Financial planning can only help improve the monetary aspect of this equation. The danger to be avoided is to hamstring the life of a firm's daily practice with those kinds of financial systems and controls which create unnecessarily burdensome obstacles to the servicing of client matters in a timely manner, and make little sense to anyone other than the individual who created the system.

The true measure of leadership of the lawyer managers of today's law firm is the ability to maintain a careful balance between the need to 1) encourage each lawyer's individual initiative, 2) provide for the much needed atmosphere of professional camaraderie so typical of the partnership type of law practice, and 3) plan and implement financial tools of modern business without which the best practice can fail.

Part Two of a Two-Part Article

Managing partners, financial partners, members of executive committees and administrators must devote more of their time today, than in the past, to planning and managing their firms' finances and those functions that improve the cash flow. Part One of this article described the first three of six aspects of law firm management and economics that the author has recommended to assist them in improving their firm's cash flow: 1) cash flow; 2) a business plan; 3) budgets for revenues, expenses and client advances. Part Two examines the remaining aspects: 4) partner compensation; 5) a recommended new business and billing committee; and 6) partners' capital and borrowing.

Good cash flow requires management and financial controls, two disciplines that operate as limitations on the independent actions of attorneys in group practice.

Attorneys realize that they must submit to systems and controls to manage the financial aspects of their practices in order to survive in the ever-increasing competitive environment that has engulfed them. Nevertheless, the introduction and implementation of these systems and controls by lawyer management do not engender “love” from their partners. On the other hand, careful financial management will bring rewards in terms of improved operating results and avoidance of unhappy or even painful surprises.

4. Compensation. Your compensation system should provide, and if it doesn't, you should consider it, recognition of lawyers who are prompt in billing and collecting. We recommend this be accomplished through the judgmental portion of your profit distribution system. Of course, certain types of legal business do not lend themselves to monthly billing ' ie, probate administration, contingent fee litigation, certain financings, etc. However, in that case you should recognize the time value of money in setting hourly rates and fees.

Old accounts, unbilled and billed, should be written off, not necessarily off the books, but for the purpose of determining current compensation. Some firms do this with respect to all accounts over one year old.

5. New Business and Billing Committee. In the old days, each partner made his or her own decision whether or not to take on a particular piece of business. Unfortunately, the growth of the business and the eagerness to take on new business, have led to billing and collection problems. My response has been the creation of a New Business and Billing Committee that serves several purposes:

No new client matter (for a new or an existing client) can be accepted without prior approval of the committee. This committee should meet weekly. Any committee member may approve new matters that cannot wait for committee approval. The committee checks the conflict of interest questionnaire, client credit information, applicable hourly rates and billing arrangements proposed by the responsible attorney.

The committee also reviews every invoice in excess of certain amount to audit the amount to be billed versus previously approved or agreed upon billing arrangements and applicable rates. Most lawyers have found this committee to be most helpful in ferreting out clients or matters which should be not acceptable, or only on the basis of a significant up-front retainer. I need not mention the benefits of the conflict of interest review. Finally, it is expected that the review of invoices will produce noticeable results in increasing your firm's realization of established billing rates and avoid discounting of time or rates.

It is a fact of life that most lawyers tend to be tough in evaluating business prospects, have more courage in billing top rates, and do a better job in advising clients of our billing practice ahead of time, if we have to account currently to a committee of peers.

6. Partners' Capital and Borrowings. For years, most firms have followed an arbitrary rule of thumb which calls for partners' capital to equal approximately 60% of the firm's investments in fixed assets, such as office equipment, leasehold improvements, etc. Partners add to capital each year and receive interest on this capital account at the average prime rate.

In addition I frequently recommend the firm withhold 5% of the annual net income and distribute same at the beginning of the second quarter of their next fiscal year.

Cash flow from operations, partners' capital, and the five percent hold back enables many firms to limit their bank borrowings to cover short-term needs.

Cash balances should be monitored carefully to maximize return on cash. Most cash should be invested to the extent that firms sometimes have to borrow money short-term. Partners should be on fixed monthly draws that may be supplemented with partial distributions on June 1 and September 1, cash flow permitting, however, partners' draws should be on the conservative side.

In conclusion, I want to emphasize that systems and controls do not give you results in and of themselves. It is the quality of legal services, marketed in a common sense way, rendered to clients, that produces the psychic and monetary rewards that lawyers seek.

Financial planning can only help improve the monetary aspect of this equation. The danger to be avoided is to hamstring the life of a firm's daily practice with those kinds of financial systems and controls which create unnecessarily burdensome obstacles to the servicing of client matters in a timely manner, and make little sense to anyone other than the individual who created the system.

The true measure of leadership of the lawyer managers of today's law firm is the ability to maintain a careful balance between the need to 1) encourage each lawyer's individual initiative, 2) provide for the much needed atmosphere of professional camaraderie so typical of the partnership type of law practice, and 3) plan and implement financial tools of modern business without which the best practice can fail.