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Cash Management: Know What You Need, Get It, and Put It to Work

By Edward Poll
June 30, 2009

The cash-flow statement is the single most important tool for the success of any business. Most lawyers, and even many large law firms, begin to realize that they are in trouble only after the money ceases to come in the door. However, cash flow cessation is usually the last symptom of a downward spiral that started long before.

An example of warning signs can be seen in the world of sports: A law practice is like an athlete who is exercising in hot weather. Hydration ' maintaining adequate body fluids ' is critical to an athlete's performance and health. In fact, dehydration can lead to serious medical problems such as heat exhaustion, heat stroke, and ultimately death. Unfortunately, the body's ability to detect dehydration is slow. There is a lag between the time the body becomes dehydrated and when it sends the thirst signal to head to the nearest water supply. Athletes anticipate this problem by drinking plenty of fluids before and during exercise, even if they are not thirsty.

How Much Cash Do You Need?

A law practice works the same way. The point at which cash stops coming in the door is much too late to start wondering if there is a problem. Managing the flow of money is the number one consideration for a firm's survival. Practice needs should always be met first.

Personal needs should be the minimum expense necessary to maintain a reasonable standard of living. These expenses should be paid after payments for practice expenses.

These four factors determine how much money any firm will need for ongoing operations:

  • Volume: The greater your billings, the greater the need will be for cash in the firm. That's because the time between when you send out a bill and when you receive payment averages more than four months nationally. The more client invoices you have outstanding, the more cash you'll need while waiting for payment.
  • Growth Rate: Faster growing firms will likely need more money for supplies and equipment, staff support, and office space. While you're waiting for clients to pay you, vendors, landlords, and utilities expect payment immediately.
  • Capital Turnover: This defines how often the invested assets of the firm are being returned in revenues. Higher rates of turnover produce more revenue on the same amount of assets. The faster you get clients to pay you, the better your turnover ratio. That's why you should review your receivables weekly to see who has and hasn't paid. Never wait until the end of the month to check turnover ' that loses 30 more days in getting the cash you need.
  • Credit Terms. The more lenient your terms to clients, the more cash you'll need while awaiting payment. Conversely, tough credit terms (such as charging interest on unpaid balances) are likely counterproductive ' clients who won't pay their bills won't pay the interest, either. Never give in to the temptation to extend credit in the hope that the client will give you more work. Strive to get paid quickly for the work that has already been done.

This last point is particularly significant because if the client hasn't paid the fee while you continue to work on its matter, you have in essence extended a no-cost loan to the client. Just as most banks will not carry you in the hope that you will pay on an outstanding loan, it makes no sense to do the same thing with your clients on a vague hope of being paid as expenses pile up. The engagement letter should clearly state the consequences to the client for failure to honor the agreed-upon payment commitment. Keep track of when clients are behind on their payments, and never hesitate to contact clients when they are late with payments. In a worst case situation, cut your losses and end the engagement. The ABA's Code of Professional Conduct, Rule 1.16, allows lawyers to withdraw if the client has not met an obligation to pay and the lawyer has given adequate warning that representation will end.

How Do You Get Cash from the Client?

Lawyers can control cash receipts from clients to a greater degree than they usually believe is possible. When they enter a professional relationship, the lawyer and the
client are creating a two-way bargain. The lawyer agrees to perform to the best of his or her ability in accord with professional standards, and the client agrees to communicate and cooperate fully ' which includes paying the bill. Stipulating payment rates and terms upfront is the best way to get paid. This is particularly true when the client accepts a budget that addresses events, time, and anticipated fees. That increases the chances of collecting your fee significantly because the client understands what to expect. The engagement letter should define an ongoing communication process about expenses versus budget in the engagement.

Shared expectations, effective communication, and dependable follow-through by lawyer and client all define the kind of good relationship that results in collecting a higher percentage of your billings. Despite what some lawyers think, the two are tied together. You truly have a good relationship with your client only when the client's account receivable is up to date. Delinquent accounts indicate that the client doesn't respect you, is attempting to hoodwink or undercut you, or is dissatisfied and considering disciplinary action against you.

If a client has the ability to pay but is not paying, it is likely that the client is unhappy with some aspect of the representation. The client chose to express that by slowing down or stopping the payment schedule. To avoid such a situation, stay in continual touch with the client about progress according to the budget. Make note of any additional time and expenses that may be incurred. If a slowdown in payments does take place and it appears to be due to client dissatisfaction, talk with the client and find out what the issue is.

How Do You Manage Cash with the Bank?

Let's assume the best case scenario, that you have a client's check in hand. For the most part, lawyers still get paid by personal checks from clients and must physically deposit those checks with the bank. The first rule of cash management is never wait to deposit checks. While a check is being held for deposit, too many problems can happen: The client may become angry and stop payment, have insufficient funds when the check is finally presented for clearance, or become party to a lawsuit or other proceeding in which financial assets are attached.

Deposit all checks from clients. Do this even if the amount received does not match the amount due per the statement. Make a photocopy of the check. After making the deposit, call the client and ask for an explanation of the difference. You will ultimately reconcile the amount paid with the amount due; however, in the meantime, you will have deposited and benefited from the amount sent to you. The only exception is when there is a disputed claim, and a check is marked “paid in full,” with the check amount being less than the amount owed to you.

There can be additional deposit difficulties involved. For example, an attorney is not automatically authorized to endorse the client's name to checks. This can be an issue with a two-party check in which one of the parties is not available (out of the country on business, for example) to endorse it. Too many discipline cases involve lawyers forging endorsements to settlement checks, lying to the client about whether the check was received or about the amount, and then walking off with the proceeds.

Banks can refuse any deposit for any reason. By accepting a two-party check as a deposit the banks may feel they have liability if there was a dispute between the parties. But by cashing rather than depositing the check, the liability for any dispute is on the account holder, and the bank believes it does not assume liability. As long as you have the funds in your account to cover the check, it should go through.

There are two caveats to this. First, your funds equivalent to the amount of the check will be placed on hold until the check clears. This won't be a problem if you turn around and deposit the funds to the account. Any hold can only be until the check actually clears, which is usually midnight the same day according to the newest check clearing rules, although some banks will hold checks for more than $5,000 slightly longer. Second, if the check is refused by the originating bank or is disputed elsewhere, you are liable to make your bank whole. Technology now offers a way to avoid this problem entirely. Firms are taking advantage of the new check scanners offered by some banks to more quickly and securely deposit client checks. Scanners treat a check virtually as a debit card, making deposit instantaneous.

How Do You Avoid Economic Failure?

Much of this discussion involves technical issues, but a firm cannot control its destiny unless it controls its business functions. Firms that understand “The Business of Law'” are able to avoid the fate of the athlete who performs at an unsustainable pace without adequate hydration. In any business, if you do not adequately secure the cash you are owed, you are going to face problems in short order. Too many lawyers think that financial success means ever-rising billable hours. The truth is that a lawyer's inventory is not billable hours ' it's the amount of cash that is realized from the billable hours outstanding. The lesson is obvious: Lawyers must vigilantly focus their energy on collecting what they bill and putting it to use quickly. Failure to do so will cause economic failure.


Edward Poll, J.D., M.B.A., CMC, is a member of this newsletter's Board of Editors, a Fellow of the College of Law Practice Management, a Board Certified Coach to the Legal Profession, SAC, and a Member of the Million Dollar Consulting' Hall of Fame. He helps attorneys and law firms increase profitability by consulting on issues of internal operations, business development, and financial matters. He has 25 years of experience as a practicing attorney and has served as CEO and COO for several businesses. He founded LawBiz' Management Company and is now focused on coaching and training law firms. He is also a columnist for the Association of Legal Administrators and contributes the 'LawBiz' Coach's Corner' to Lawyers Weekly.

The cash-flow statement is the single most important tool for the success of any business. Most lawyers, and even many large law firms, begin to realize that they are in trouble only after the money ceases to come in the door. However, cash flow cessation is usually the last symptom of a downward spiral that started long before.

An example of warning signs can be seen in the world of sports: A law practice is like an athlete who is exercising in hot weather. Hydration ' maintaining adequate body fluids ' is critical to an athlete's performance and health. In fact, dehydration can lead to serious medical problems such as heat exhaustion, heat stroke, and ultimately death. Unfortunately, the body's ability to detect dehydration is slow. There is a lag between the time the body becomes dehydrated and when it sends the thirst signal to head to the nearest water supply. Athletes anticipate this problem by drinking plenty of fluids before and during exercise, even if they are not thirsty.

How Much Cash Do You Need?

A law practice works the same way. The point at which cash stops coming in the door is much too late to start wondering if there is a problem. Managing the flow of money is the number one consideration for a firm's survival. Practice needs should always be met first.

Personal needs should be the minimum expense necessary to maintain a reasonable standard of living. These expenses should be paid after payments for practice expenses.

These four factors determine how much money any firm will need for ongoing operations:

  • Volume: The greater your billings, the greater the need will be for cash in the firm. That's because the time between when you send out a bill and when you receive payment averages more than four months nationally. The more client invoices you have outstanding, the more cash you'll need while waiting for payment.
  • Growth Rate: Faster growing firms will likely need more money for supplies and equipment, staff support, and office space. While you're waiting for clients to pay you, vendors, landlords, and utilities expect payment immediately.
  • Capital Turnover: This defines how often the invested assets of the firm are being returned in revenues. Higher rates of turnover produce more revenue on the same amount of assets. The faster you get clients to pay you, the better your turnover ratio. That's why you should review your receivables weekly to see who has and hasn't paid. Never wait until the end of the month to check turnover ' that loses 30 more days in getting the cash you need.
  • Credit Terms. The more lenient your terms to clients, the more cash you'll need while awaiting payment. Conversely, tough credit terms (such as charging interest on unpaid balances) are likely counterproductive ' clients who won't pay their bills won't pay the interest, either. Never give in to the temptation to extend credit in the hope that the client will give you more work. Strive to get paid quickly for the work that has already been done.

This last point is particularly significant because if the client hasn't paid the fee while you continue to work on its matter, you have in essence extended a no-cost loan to the client. Just as most banks will not carry you in the hope that you will pay on an outstanding loan, it makes no sense to do the same thing with your clients on a vague hope of being paid as expenses pile up. The engagement letter should clearly state the consequences to the client for failure to honor the agreed-upon payment commitment. Keep track of when clients are behind on their payments, and never hesitate to contact clients when they are late with payments. In a worst case situation, cut your losses and end the engagement. The ABA's Code of Professional Conduct, Rule 1.16, allows lawyers to withdraw if the client has not met an obligation to pay and the lawyer has given adequate warning that representation will end.

How Do You Get Cash from the Client?

Lawyers can control cash receipts from clients to a greater degree than they usually believe is possible. When they enter a professional relationship, the lawyer and the
client are creating a two-way bargain. The lawyer agrees to perform to the best of his or her ability in accord with professional standards, and the client agrees to communicate and cooperate fully ' which includes paying the bill. Stipulating payment rates and terms upfront is the best way to get paid. This is particularly true when the client accepts a budget that addresses events, time, and anticipated fees. That increases the chances of collecting your fee significantly because the client understands what to expect. The engagement letter should define an ongoing communication process about expenses versus budget in the engagement.

Shared expectations, effective communication, and dependable follow-through by lawyer and client all define the kind of good relationship that results in collecting a higher percentage of your billings. Despite what some lawyers think, the two are tied together. You truly have a good relationship with your client only when the client's account receivable is up to date. Delinquent accounts indicate that the client doesn't respect you, is attempting to hoodwink or undercut you, or is dissatisfied and considering disciplinary action against you.

If a client has the ability to pay but is not paying, it is likely that the client is unhappy with some aspect of the representation. The client chose to express that by slowing down or stopping the payment schedule. To avoid such a situation, stay in continual touch with the client about progress according to the budget. Make note of any additional time and expenses that may be incurred. If a slowdown in payments does take place and it appears to be due to client dissatisfaction, talk with the client and find out what the issue is.

How Do You Manage Cash with the Bank?

Let's assume the best case scenario, that you have a client's check in hand. For the most part, lawyers still get paid by personal checks from clients and must physically deposit those checks with the bank. The first rule of cash management is never wait to deposit checks. While a check is being held for deposit, too many problems can happen: The client may become angry and stop payment, have insufficient funds when the check is finally presented for clearance, or become party to a lawsuit or other proceeding in which financial assets are attached.

Deposit all checks from clients. Do this even if the amount received does not match the amount due per the statement. Make a photocopy of the check. After making the deposit, call the client and ask for an explanation of the difference. You will ultimately reconcile the amount paid with the amount due; however, in the meantime, you will have deposited and benefited from the amount sent to you. The only exception is when there is a disputed claim, and a check is marked “paid in full,” with the check amount being less than the amount owed to you.

There can be additional deposit difficulties involved. For example, an attorney is not automatically authorized to endorse the client's name to checks. This can be an issue with a two-party check in which one of the parties is not available (out of the country on business, for example) to endorse it. Too many discipline cases involve lawyers forging endorsements to settlement checks, lying to the client about whether the check was received or about the amount, and then walking off with the proceeds.

Banks can refuse any deposit for any reason. By accepting a two-party check as a deposit the banks may feel they have liability if there was a dispute between the parties. But by cashing rather than depositing the check, the liability for any dispute is on the account holder, and the bank believes it does not assume liability. As long as you have the funds in your account to cover the check, it should go through.

There are two caveats to this. First, your funds equivalent to the amount of the check will be placed on hold until the check clears. This won't be a problem if you turn around and deposit the funds to the account. Any hold can only be until the check actually clears, which is usually midnight the same day according to the newest check clearing rules, although some banks will hold checks for more than $5,000 slightly longer. Second, if the check is refused by the originating bank or is disputed elsewhere, you are liable to make your bank whole. Technology now offers a way to avoid this problem entirely. Firms are taking advantage of the new check scanners offered by some banks to more quickly and securely deposit client checks. Scanners treat a check virtually as a debit card, making deposit instantaneous.

How Do You Avoid Economic Failure?

Much of this discussion involves technical issues, but a firm cannot control its destiny unless it controls its business functions. Firms that understand “The Business of Law'” are able to avoid the fate of the athlete who performs at an unsustainable pace without adequate hydration. In any business, if you do not adequately secure the cash you are owed, you are going to face problems in short order. Too many lawyers think that financial success means ever-rising billable hours. The truth is that a lawyer's inventory is not billable hours ' it's the amount of cash that is realized from the billable hours outstanding. The lesson is obvious: Lawyers must vigilantly focus their energy on collecting what they bill and putting it to use quickly. Failure to do so will cause economic failure.


Edward Poll, J.D., M.B.A., CMC, is a member of this newsletter's Board of Editors, a Fellow of the College of Law Practice Management, a Board Certified Coach to the Legal Profession, SAC, and a Member of the Million Dollar Consulting' Hall of Fame. He helps attorneys and law firms increase profitability by consulting on issues of internal operations, business development, and financial matters. He has 25 years of experience as a practicing attorney and has served as CEO and COO for several businesses. He founded LawBiz' Management Company and is now focused on coaching and training law firms. He is also a columnist for the Association of Legal Administrators and contributes the 'LawBiz' Coach's Corner' to Lawyers Weekly.

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