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Improving Management of Hard Disbursements

By Steven J. Henry
October 30, 2006

Improved hard-disbursements management can mean major improvements for firms' financial performance.

In the mid-1990s, the IRS stopped allowing lawyers to deduct as a business expense funds advanced for clients, treating their repayment as income. The agency said such advances should be treated as loans. This policy turned the nation's lawyers into bankers making interest-free loans. Last year, the AmLaw 100 firms alone reportedly advanced more than $4.5 billion in such loans.

Firms typically average about 120 days from the date they pay outside vendors to the date clients repay firms. Most firms lay out the cash and finance these payments on behalf of their clients without charging interest to cover their own cost of funds. Bank borrowings or borrowings from principals as additional capital are needed to pay vendors when firms pay before clients do.

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