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Working Capital Issues for the Law Firm
Part One of a Two-Part Series
Working capital is about cash flow and the cash needs of your law firm. Simply put, it is the cash gap between when your firm pays for something and when the firm receives payment from the client. Ideally, a firm would receive client payment before incurring the costs, creating a negative cash gap situation. At one time Amazon.com worked on a negative cash gap process ' Amazon.com was paid by the consumer, by way of a credit card charge, before it had to pay its vendors for the purchased product and shipping. The law firm equivalent of a negative cash gap is retainers. 'Retail' law firms could also exploit the credit card mechanism exploited by Amazon.com.
Typically, the cash gap for law firm payables and receivables runs about 105 days. Unbilled time turns over in 60-70 days. Accounts receivable turn over in 60-80 days. Accounts payable generally run on a 30-day cycle. With labor costs being the single largest overhead item for law firms (usually paid bi-weekly or semi-monthly), the financial burden is aggravated because labor's cash gap is closer to 120 days on average.
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