Cash Flow Strategies for Busy Lawyers

Welcome to Accountants Law Pod, where accounting professionals and law firms converge, hosted by Linda Artesani, Sarah Prevost, and Stephen Libhart.

Hi Sarah, how are you today?

I'm doing well, Steve.

How about you? Good, good. And hello everybody out there listening and watching the podcast. Linda's not with us today, she traveled over the weekend, and you're going to be joining her Uh, when we're recording this, you guys are getting ready to go to ClioCon up in the Boston area. So we hope that Linda traveled safe, and Sarah and I have lots of nuggets for you today. We're going to be talking about, um, cash flow strategy for busy lawyers.

Yes, and it's always the, it's always the, the big conversation that you have, not at the beginning, kind of at the end. Here's all my dysfunction, here's all my mess. Now, how do I find out where all my cash is?

Where's my money? And, you know, we talk about that a lot in this podcast, how they, you know, they've got the P&L and the balance sheet and, you know, we give them, you know, you made all this money, we give them the numbers, you made all this money, and they're like, well, where's, where's my money then? Yeah. So, so I hope today we can kind of peel back that onion and, and share some nuggets that help people. So do you, do you want to jump into your description that you have on that, Sarah?

We have a very simplified description, which I appreciate. And let me come back to it here. I've just pulled it over here. Okay, in simple terms regarding cash flow, what it is, it tracks how much actual cash is coming in and going out, and the going out has a whole bunch of things in there that people don't think about beyond expenses. So I think there's a forgotten piece of I have a credit card. It has to be paid. That's money going out.

And that, that credit card payment is, is not on the P&L, is it?

Nope, not on the P&L.

But it's money that went out.

I took a draw or a distribution depending on what entity structure you are.

401 distributions from the last year that are done when the taxes are done this year.

Precisely. How about loans? I had to get an equity loan, infused cash. So the cash came in, cash goes out. So a lot of kind of the net movement of cash is really what a cash flow statement is showing you. It's interpreting it and understanding it. And I think, Steve, you had a good list of about 8 or so items.

I've got 8 of them that I'll run through real quick, and then we can jump on whichever ones we want. And, um, some of them match our show notes that Tiara just so nicely put together for us this morning. But so I was like, when I saw her notes, I was like, oh, I'm on it. I've got, I've got exactly what's gonna match up here. But, um, one is automating the retainer replenishment. Um, the second one is converting client cost to receivables quickly, especially if you're a personal injury firm or, uh, immigration firm. We'll talk about that. Offering multiple payment options.

Mm-hmm.

Um, building reserve accounts, shortening your billing cycles. That's a big one. Especially when cash flow is tight. Audit your aged receivables at least on a monthly basis and have a meeting and discuss it and hold people accountable. Scheduling regular financial reviews. And I'll give a shout out to Clio here. I really like their Clio report where we have one firm that pulls the WIP and the AR and the lockup every week.

Mm-hmm.

And then we set goals for bank balances and things like that and really watch what's What's tied up in lockup? I think that's a great report. And if you're scheduling regular financial reviews and getting those numbers as you go along, it really does make a difference. Eliminating unprofitable case types— so analyzing what your mix of business is and what's making money and what's not really helps with cash flow. So those are some of the subjects that I came up with.

Okay. And I, um, I was trying to grab my notepad here to take some notes, but I can tell you something else that's not discussed And you brought this up a little bit by the software. When you are in fractured software and you have multiple pieces, where is the best source for you to rely on what that cash flow is? You have revenue items that you want to look at in your practice management, and what is the overhead? Where is the, the firm going? And that could be your QuickBooks software, that could be your Xero software, and ensuring that those marry up properly and those are balanced monthly.

Exactly.

With that cash flow. So, um, I, I bring that up because software is, is a key piece, and it's oftentimes the piece that we see people try to spend less in or spend too much in.

Well, you know what, that what happens is so many law firms will purchase— they'll, they'll choose whatever software it is they want to use, and they think it's plug and play, and they don't pay as much attention to it as they should. And to your point, balancing the 2 systems against each other, using cost receivables again as an example, if that's not balanced to billing system in QuickBooks, if it's— or, or Xero— if it's not balanced to the billing software, what good is it doing you? You're missing, and you're missing money. You're losing money.

And I think, Steve, the one part that I wanted to bring up and discuss a little bit further is you brought this up, accounts receivable, um, in, in your 8 as well as just now, whereas the timing of it and, and the retainer. You know, if you think about it, it is somewhat nice to understand a little bit of predictability if you're the client of a firm, to understand how—

Yeah.

It's hard to— so it's hard to know where a case is going to go. It's hard to budget. I mean, a lot of times when you hear, I'm going to have to hire an attorney, the first thing people think of is dollar signs. It's a scary thing in addition to the emotional. piece to it. But I also feel like if it's not in a contingency-based moment, and you have costs that are going to be incurring, it is nice for your clients to have some predictability. And changing the billing cycle to make it more affordable is helpful, not just for you as the firm owner, but it's also helpful for the client. And so I think As we hear people talk about subscription models or flat fee is understanding how that impacts. So, you know, my retainer is $5,000.

Okay.

And then what happens from there? And how frequently do you want the money? Or when do you— can they opt to change that to help them with their own budgeting? When it's individuals, when it's businesses, it's also a different thing too. It's the same kind of metric. So I feel like we're seeing it. I know you are, Steve, too. We're seeing a change in how folks are billing. But I feel like allowing yourself the opportunity to review it more frequently is probably the better thing to do than probably once a year or every 6 months kind of deal.

Absolutely. Absolutely. And communicating with the law firm, communicating with their client during the different Phases of the case, of the work.

Of the work.

Um, I mean, we had a guest on this podcast who was a criminal defense attorney who gave an example of this large retainer that he took and then found out that he didn't need it after all because the case settled. And he, you know, he was like, I've got to give some of this back. So, you know, he was on top of it. But I think the lesson learned there was, um, you know, did I need that much of a retainer, or Am I going to stair-step the billing? And does my client agreement say I'll take this much when this action happens, when this motion is approved, when, you know, those sort of things as the case progresses? Um, and then setting up evergreen retainers so that they're replenished. I work with evergreen retainers with new clients.

Yeah.

Um, here it's like, you know, especially if it's a cleanup or something like that, or a trust cleanup especially.

Yeah.

Because those can, can get expensive and you don't want to surprise them. So.

Yeah. Well, I, I think even going a little further back too is understanding, and this is where an accountant, like you're hiring someone to do the accounting, the bookkeeping, and they're asking all these questions. It's because they want to understand. So where's the bottleneck happening? Is it at the time of billing? Like getting the bills out the door sometimes are—

That's a huge bottleneck. You bet.

I mean, I, I, it would— helping, it is difficult. You have to help somebody build a pattern that's repeatable and supportive. Sometimes that's an emotional conversation for some because it's amount of time, like how much time do I have to spend doing this? So I don't know what your thoughts are on that, but I feel like—

Well, and you know, law firms quite often will put somebody in the position of billing, if you will, and then they'll take the approach of, well, that's not a revenue generating position for my law firm. So it's not as important as, let's say, an attorney or a paralegal position is. And I, I disagree. I think that the billing, the person doing the billing, is one of the most crucial and important pieces of the whole puzzle. And even though they're not generating revenue, they're protecting revenue, and that's huge. That generates revenue. So you need to look at it that way.

Do you feel, Steve, um, I, I know in our service offering it goes hand in hand, but do you feel that this is a part that might also be somewhat of a sticking point with cash flow? Send all those bills out, the billing person's sending them out, who's following up?

Right.

Who does that?

And are they sending them out without a review beforehand?

Ah.

You know, have those dialogues with in-house before you send the bills out. Have a workflow that allows for Um, everybody that touched that client that month to review the bill. And then, to your point, following up.

So the question I have is, who does the follow-up? Because sometimes, depending on the matter and the sensitivity of it, sometimes the attorney that's doing the work, maybe the responsible attorney or the originating, may want to be the one to follow up. Other times it's not as needed, so it's just a matter of following up and how you follow up. And what the expected timeline is. Because the other part is, is do you keep working on a file? What is the billing protocol for the firm ultimately, even if you're a firm of one?

Right. Right.

Yeah.

Absolutely.

And I've always felt it is nice to send the bills out if you are the firm owner, but then it is nice to not be the person following up. Or vice versa, like—

Well, to me, the person following up is almost a sales position then. You know, did you receive our invoice? Did you have any questions? And then if they have something they want to challenge, then handle it proactively. And what else can we do for you? Or how can we make it better? Or, you know, there's nothing wrong with asking those questions. It takes a certain talent to do that, to, to kind of deflect some of the negativity that might pop up. But it's also a great, great opportunity to fix. things and to generate future business.

I also feel, and I think this, and maybe this comes from the day and age when we were working together or working in the same field, line of work. You never know where your business is going to come from. So that's right. You're interacting with someone, it's an interaction with care, because that interaction could lead to business down the road.

Absolutely.

So it kind of goes all ways and cash, especially your clients, the firm's clients, and you want the right person in the seat to your point of the person who is doing the billing and possibly collecting. It has a professionalism that you'd like, a care that you want because these are your clients. They're entrusting you to do this legal work. And so you want to foster the repetitive nature of or referral nature of business.

So, um, you know, one little trick that— one little trick that works is, um, you know, there's retention requirements for files, generally 7 years to keep the client's file. And then at that point in time, you need to offer them their file or destroy it or whatever. It's, you know, if you're— if you have a slow-paying client, for some reason they have a balance left over, you didn't have enough retainer or whatever, um, It's a great time to call them up and say, hey, did you get the bill? Did you have questions? All the things we just talked about. And we just wanted to remind you— I'm role-playing now— we just wanted to remind you that we're required to keep your file for 7 years. And at that point in time, we can go ahead and release it to you. We can, we can shred it, whatever. And you, you keep the business ball rolling.

Absolutely.

And it shows interest. They're like, oh, they've got all this information. That's right. Um, yeah. And, and you find ways for them to pay you. You know, they might say, hey, business has been slow. We're all running into that now, you know, with the state of affairs in our economy right now. People are slowing down with, with payment. And, um, it's a great time to work out payment plans or whatever you need to do. But you've got to have—

Yeah.

The ability to give that person making that call the, the, the permission to negotiate or to say, hey, I need to speak to Mr. Jones, the attorney, and I will get back with you.

You know, so what if I twist this on the corner here and kind of go around the corner and talk about contingency firms? Because cash flow is very hard to plan.

And boy, it is. Yeah.

So what are the things that they— that are— I mean, a lot of firm owners that are out there now really know this very well, but what are things that you've seen that are successful, or do you have some tips and tricks on contingency?

With— let's use personal injury as an example. Cost receivable. You know, they have to— they have to go out and get medical records and witness reports and all kinds of different things that the firm is fronting on behalf of that client, it's okay to go ahead and bill for those, to go ahead and collect for those. I mean, they, they produce a little bit of cash flow. Um, sometimes the, you know, for hard costs, you know, now if you get to recoup a little bit, depending— Just to recoup a little bit. Yeah.

Yeah. Depends on the case too. Like sometimes you— yeah.

So now line of credit is huge. For a firm like that, you know, getting a good solid line of credit, credit at the bank because you've still got to pay your employees. Budgeting is huge in a firm like that. Just, you know, where, where are you getting your business from?

Where—

what type of personal injury cases are they? Those sort of things, because cash is so tight in those types of firms. And then—

Another practice area, really. You do practice areas for that.

Yeah. Yeah. Quite often that has to happen, especially with solo attorneys. You know, they think they're going to get into personal injury And it's going to be instant cash. All they've got to get is that $1 million settlement and they're rich. Unfortunately, the busy bus doesn't pull up like that and people just jump out and run to the door with buckets of money. It's a lot of work. And to your point, I agree, sometimes you have to take a different type of case until you can really build that personal injury firm and create the cash flow that you need.

Well, I have found too, in my experience, not because of my own advisory but my kind of understanding and sort of observing for clients that I do work with, and I've worked with tenure, a lot of times the cash that's held in the business is held for a longer, like a bigger amount and longer time. Like there's a different evaluation to how much cash you want to have sitting in the business to buffer the months that dip and ebb and flow.

Sure.

Because you can go 3, 4 months. Where you're not going to see too much. It's not going to be that much of a cash flow crunch or cash flow in. So it becomes a crunch on the other side and you still have all these major expenses that you're going to—

You get that settlement, you know, keep your percentage, especially off the first 2 or 3 of them, and still run lean and mean. Don't go out and buy a new car, new house, all this travel, do all these things. Put the— to your point, put that money away and create that cushion that you need for those slower times, because especially in that type of a firm, it's just a roller coaster up and down and up and down.

Yeah. Well, and software can help on the firms that don't have that style. Software can help with automation of billing. You know, call it what you will, a subscription or a flat fee monthly retainer that's coming into your point. There's ways that you can work with the right software to allow for this stuff to be recurring. The biggest thing, I think, is making sure that it's easy for people— payments that are easy for people to use, like payment processing, and being able to understand where a client might need to be. I've seen different payment plan setups. Yeah, your fees are X, but I've seen different intervals allowed. Some people do it monthly, some people do it Um, twice a week, or I'm— twice a month, just to, to change the terms. So every client may not fall into the engagement that you have set up for everyone. You might modify to help.

You can stagger them out. There's nothing wrong with that. You know, one of the things I teach at the, uh, when I teach the new attorneys at the, uh, Bar Association where I'm on the faculty, I teach the new attorneys to get in the habit of billing earlier in the month. You don't have to wait till the 30th or 31st. Bill on the 20th. You know, you're gonna, you're gonna get the cash quicker than— because everybody bills at the end of the month, and then the next month comes and the client's gonna pay, you know, their doctor first or their car payment first or whatever. The attorney is usually last in line.

Yeah.

And then the AR is already aged out. You already did the work and you, you billed it at the end of the month, and then By the time it gets to them and, and they look at it and they commiserate over it, you've lost another 10 to 20 days. And then, you know, I mean, those things can really drag out. And so I say start the ball rolling early.

So, so, Steve, so can I ask you then, um, when a firm is trying to figure out cash flow and they're trying to understand, and you go and pull a cash flow statement How do you, how do you decipher what the heck that thing says?

I'm just gonna say all I do is I just, you know, I glaze over. I like to walk them through the P&L report and through the balance sheet and what the banks, what the bank balances are, and really explain each component of it to them instead of just a cash flow report. Because to me, the cash flow reports, you know, you're looking at accrual and cash basis and all kinds of different ways to look at reports. I like to just break it down and look at each component of it and explain where their cash is going. And especially because it doesn't matter if you're a law firm or if you're a daycare center or whatever kind of business you are, the balance sheet scares the bejesus out of everybody. And it's like, go ahead, go ahead and turn the page and look at it. And let's go through it. Let's embrace it. Let's look at the numbers and see where the money's tied up.

Well, okay. So then the next question I have for you is, A lot of times, uh, when you're trying to get that equity loan, what's the first thing a banker or someone in lending is going to look at?

Well, they're going to look at receivables. They're going to look at, um, the equity, what, how much the owners are taking out. They're going to look at loans to the business.

Um, they're gonna— how much cash do you have?

How much cash? Yeah, disposable income.

Yeah. I know there's a lot of firms that want to do basically, let's— we take all the cash out. Okay, that's fine. But what's the runway for the next month?

Right?

Like, at the end of the year is what I'm thinking about is, did you budget for the next 45 days?

Yeah, I mentioned 401s a while ago. So you go and yet it's December 30th, it's December 20th. And you have a meeting in your firm and you're like, all right, we're giving out all these bonuses and we're going to go buy all these new things for the office and we're going to, we're going to spend all the money before the end of the year for the best tax advantage. And then, yeah, it's the first quarter of the next year and everything is turned into the tax preparer and they say, oh, by the way, you need to fund your 401 for another $25,000.

Oops. Or tax law has changed.

And tax law has changed. Yep. Yeah.

Going back to a conversation we had last week where we were talking about the third, the third, the third, and I appreciated the way that Danielle was discussing.

I loved how she— yeah.

Just the way through planning. And to be honest with you, cash, it seems so negative. I understand this analogy of not keeping the cash in the business. Get it out, get it out. But you also are not planning your life. You're not planning on your personal side. We don't plan the personal. We don't have anything to do with that. That's fine if you want to take it out. We're so concentrated on the business side. You're hurting the business by underestimating certain things, and then you take all this money out, and then we have to ask for it back. But guess what? You just changed your financial metric in the same year for your own personal self. So now your tax bill is different over there. People, it just, it all goes hand in hand.

It does. And it boils down to the very basics of how we should be running our lives, whether it's our business or not. Yeah, it's have that money set aside. You know, Grandma had it right. Set some money aside for a rainy day. Yeah, because they do happen.

Yeah, they do. Like all 3 appliances could go out in one day. No, I'm kidding.

Yeah, our washing machine decided to hop across the floor this weekend. I'm like, well, there we go.

Yeah. So, so when you're looking at the profit and loss, which is money in money out on a profit and loss statement for, for that segment. And then when you marry that up with your balance sheet, you're really— what you're doing is you're taking the 2 financial statements and condensing them down to a cash flow moment.

Yeah.

Is what we're saying. And when you look at cash flow statements as a whole at this moment, they're very confusing to a lot of people to stare at. Um, and explain. So it's—

Well, and it's because of the moment in time that it's at as well.

Oh, that's true.

That's huge. That's huge.

Huge.

Yeah. That's why I say I like to just go into the component side of what makes up the cash flow statement and explain it. You know, and they go, a client might go, well, what about that other $30,000? And I'll go, well, look at the date. Look at what you're looking at on the report as of that moment in time. The $30,000 didn't happen until 2 months later.

Well, it's really like the cash that you had at any given moment in the end of the day. And for every, kind of to your point, for every dollar earned, what is the expense value to that dollar?

KPIs, darling.

Yeah, your favorite thing. And how are you going to handle those expense dollars for the next, if everything were to stop for today, hypothetically? What does it look like for the next several weeks? How do you manage that? How do you make sure—

Well, and your labor cost. Oh my gosh. Yeah, really think about what's in your labor cost and don't gloss it over. Don't add things to it that are not labor costs, and don't— make sure you are including things that are, you know, because law firms tend to have very rich, um, compensation packages.

Yeah.

And a lot of, a lot of pieces go into that, and it is a labor cost when you're looking at, you know, your dollars and your KPI percentages. Um, I like to put out financial reports that show the mix of what percent each expense line is to revenue and then come up with the, the target KPIs for those different line items so we can see what's out of line and what's not. You know, is your health insurance percentage in line with your revenue? Is your bonus program in line with your revenue? Your, you know, what you're matching on 401s, what you're, you know, all those sorts of things add up.

Some of it within reason though, I will say on the health insurance side, it, it, yeah, that's out of whack right now.

I mean, that's a moving target.

It is a moving target without control. But another thing to think about and something When, when Linda would probably be in this conversation is this segment too of like, what are you doing for advertising? A lot of times what we see is when people see cash flow getting tight, they cut the advertising. And that's where you need it the most because you might need to get creative on how do you get new clients in the door depending on your line of service offerings and how do you retain referrals? I mean, do you go through your clientele base? Or do you actually put an advertisement out to get more clients? A lot of times with the—

What's your conversion rate?

Yeah, with the personal injury, a lot of times that's— those billboards are what works. You're in the face. Like, that's what's happening.

Oh my gosh. Yesterday morning— yesterday was Sunday, and I was watching the news, and every commercial was a different personal injury attorney.

Yeah, now's the time.

There must have been 4 or 5 of them. That's their sweet spot. Sunday, everybody's at home. They've partied the night before.

Stuff happens. Look at the time of year.

Yeah, yeah.

I mean, it's getting into festivity time. It's the time of year. So yeah, I mean, there are, I guess, like turning the knobs. There are ways to improve the cash flow, but I think just the basics of understanding it And understanding how it comes together. I like the way you say it— just look at the components of it first.

When you look at the components and understand those first before you go look at the report, because the report will make a lot more sense to you once you embrace all the components. And I want to back up just a little bit on the marketing, uh, side. I agree, I agree, I agree with you, Linda. Thanks for, thanks for your input today. But you got to be really careful, new attorney, Uh-huh. That you don't put such a large amount into marketing. You've got to be really focused on where you think you're going to get your return from and put the dollars in there and then focus on that. I've seen so many times where they'll put a huge marketing budget out there and they'll just buy everything that they can think of from every vendor they can think of, and then they wonder 3 weeks later why the busy bus hasn't pulled up. And it takes a while.

I was gonna say, it doesn't go like that.

It doesn't go like that. It takes a while to build it. Um, so you got to be really careful with that.

You're talking about a day and age where everything's instant lately. I mean, as instant as your phone, like everything is. And that's not the case with some things, right?

So, you know, have your, have your chat, your paid ChatGPT model calculate your conversion rates for you and have it go out and research What the industry is doing on conversion rates. Those numbers are out there. There are ways to find everything you want to know now through ChatGPT. I'm just— I'm—

Well, you have to be careful too, because it's—

You do.

And it doesn't predict a lot of the things accurately. There's been some math evaluations and some comments. I'm like, is that real? I agree.

I agree with that. But there are also prompts out there that really can go out and dig, and sometimes it takes a while to get the data back. I was playing with that 4 o'clock this morning, and you wouldn't believe the data I got back. It took it about an hour, but then I went and started checking numbers on the prompt that I had put in, and, and everything was pretty close. And so the point being, you know, there's, there's— don't let— like when I use conversion rate as an example, listeners and, and people watching this, don't let the conversion rate scare you or how you get it, but at least track it some way.

Yeah.

That makes sense to you so that You know how long it's taking you to convert based on how you got that client as a part of your marketing program.

Kind of bringing it all back here.

Okay. And I'm going to take my glasses off now. Okay.

All right.

We have to do this.

Wait a minute. Yeah. Oh, yeah. Um, with, with cash flow, simplifying it for yourself, I think, is where you're, you're saying is the best thing to do. In a simplified method, how much money is walking in? What is owed to me? What are— just do a little window of what are my future billings, right?

Right.

What are the expenses? Just the hard expenses. Even if you have to take yourself out of the equation for the minute, what does it take for my firm to run? Add yourself in there because it's important to add ourselves. We put a lot on the line. We need to put ourselves in. And then the difference— what, what's the net left over? And that times whatever factor per month that you need. If it's easier sometimes to say, okay, what are the expenses plus me times 3, times 4— I'm saying months— figure out what that is. Maybe that's the cash that you need. Find a way to simplify it to support you so you give yourself a runway.

And well, yeah, report and find out what you're good at.

Yeah.

How are you going to promote yourself? If you're really introverted and you don't like speaking in front of groups of people, don't go out and try to speak in front of groups of people. If you're really extroverted and you're an attorney, there are so many groups out there that want professionals to speak to them, and it's a great way to build business in, in your own community. Yeah, you know, there's, there's a lot of different ways to do it. So what are you good at? What are you not so good at? And talk to the person that's helping you with your SEO or your, your marketing or your consulting. They're consulting with you, whatever you've chosen, really share that with them.

Yeah, you went back on the marketing car. Okay. Yeah, I did.

I did. Because if the time falls into that budget Yeah, absolutely.

Putting it all together. Yeah, if you take these simplified methods, it'll help you. But well, this was a good conversation. Thank you.

It was. It was. I get so passionate about this sort of— because it all ties into KPIs, darn it.

I know.

I know. Well, thank you so much, everybody. Yeah.

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