Is your law firm losing revenue as a result of the Coronavirus global breakout?
Did you implement any measures to stabilize your law firm’s cash flow and the disruption to your business?
In this article, we will go over thirteen ways that you can immediately improve and put oxygen into your law firm’s cash flows so you can weather the Coronavirus storm and emerge even stronger. We will look at things like monitoring your cash flows, billing your clients on a timely basis, setting up a cash reserve and emergency file, implementing approvals on your discretionary and non-essential law firm expenses and so on.
By adopting immediate and actionable strategies to protect your law firm’s cash position, you can provide your employees and partners a stable and secure environment allowing all to remain united and focused on protecting your law firm’s vital signs.
The thirteen ways that we propose to improve your law firm’s cash position and finance on the short-term is as follows:
- Monitor your law firm incoming cash flow
- Invoice on a timely basis
- Monitor your operational expenses and outgoing cash flow
- Look at your payment terms with vendors and suppliers
- Demand approvals for non-essential expenses
- Consider leveraging legal technology to cut operational costs
- Implement processes to collect your receivables
- Have new clients deposit a retainer fee
- Try to keep your payroll stable
- Put some emergency funds aside
- Get a line of credit or extend your credit limit
- Reassess your budget
- Take action to improve your law firm finances
Let’s get right into it…
1- Monitor your law firm incoming cash flow
In good times or bad, you should monitor your law firm’s cash flow on a regular basis to assess your overall financial health.
When things are good and you have a constant stream of cash coming in, you may not be tempted to do this exercise as rigorously although the idea lingers somewhere at the back of your mind.
However, when the economy slows down or a few major clients leave your firm, perhaps some partners leave, your law firm’s cash flow fluctuations can create an operational disruption that you should plan for, monitor and address.
Make sure you manage your law firm’s cash flow tightly.
It would be useful that you track what you expect to receive from clients every month for the next two or three months. This way, you will have a better idea what to expect in cash coming in.
Considering the economy will contract, you’ll need to make sure that you have enough cash on hand and enough cash coming in to support your law firm’s operations for the next few months.
You should plan to have sufficient cash to get you by for at least three months. If you can plan for more time, even better.
2- Invoice clients on a timely basis
To manage your law firm’s short-term cash flow, you’ll need to stay on top of your invoicing and billing operations.
It’s easy to fall behind on your invoicing and billing operations in normal times. In today’s economic context, you cannot fall behind. Don’t let that happen!
You’ll need to be accountable to invoice your clients on a timely basis and ensure other lawyers working in your firm are accountable to invoice their clients on a timely basis.
If you have a good law firm invoicing strategy, you will monetize your services sooner. Why have your services sit in a work-in-progress status, you need to invoice and get paid.
The longer you wait to invoice, the more likely that your clients will forget about the services you rendered and challenge you on your invoice. Can you blame them?
One thing is for sure, all companies are now analyzing their accounts payable very closely and will be more selective. Make sure your invoice goes out to them asap.
When you regularly invoice for your services as they are being rendered, your client will have less excuses to dispute your fees and can better better absorb smaller chunks of legal fees in their budget.
In hard economic times, you should make sure that you get paid as soon as possible for the work that you do, no more credit extensions! At least on the short-term.
3- Monitor your operational expenses and outgoing cash flow
Monitoring your outgoing cash flow is as crucial for a healthy short-term law firm finance.
Take a close look at your law firm’s operational expenses, hard costs and soft costs, and see what you can do to minimize your expenses while preserving the integrity of your law firm’s operations.
What are the expenses that you cannot cut down? What expenses can you cut or perhaps renegotiate with your vendors.
As you consider your expenses, make sure you make a two to three month forecast of what expenses you’ll be required to pay so you can plan for them accordingly.
Do you have enough cash flow from operations to pay for your expenses in the event you are a victim of cash flow disruptions?
It would be a good idea to do a cash flow scenario analysis where you do an optimist forecast and a conservative forecast based on different likely scenarios that you could face in the next few months.
Don’t be too optimistic or too pessimistic, try to run a few scenarios that you could reasonably expect.
This is not a purely mathematical and scientific process. You will need to exercise your best business judgment in analysing your short-term financial position.
When you are looking at a very short-term budget, chances are that you can achieve a much higher level of accuracy, so do your best and assess your expenses based on numbers as closest as you can get to your actual numbers.
4- Look at your payment terms with vendors and suppliers
Make yourself a list of all your active vendors and suppliers and determine if you still need all of them in light of today’s economic downturn.
Are there suppliers or vendors with whom you can terminate your relationship as you do not need them or you’ve been paying yourself some luxuries that you can do without on the short-term?
Are there vendors that you need to keep and with whom you have a wiggle room in your contractual payment term?
If you regularly pay your vendors within 60 days, do you have vendors that have extended to you longer payment terms allowing you to delay payment without putting yourself in default?
You should also look at the possibility of taking your legacy vendor contracts with whom you have a good and long-standing relationship and see if you can renegotiate your fees, charges or payment terms.
A vendor giving you some slack is better than nothing!
5- Demand approvals for non-essential expenses
To support your plan to boost your law firm’s financial health, you should put a lid on the non-essential expenses.
If your law firm has a discretionary budget to spend on clients, on business development activities and the like, make sure that an appropriate validation and approval is required before any discretionary money is spent.
If your law firm’s cash flows allow you to keep your discretionary budget in light of the Coronavirus economic shift, then that’s great. If not, make sure you manage it well.
Any non-essential expense that your law firm or lawyers want to incur, you’ll need to ensure you subject all of them to an approval process so you can align your expense based on your budget and cash flow.
Your law firm’s business must continue, as a result, you’ll still need to spend on business development and marketing, among other things.
Now, you’ll need to be selective about where you are going to put your money so you can get the best return on your investment.
6- Consider leveraging legal technology to cut operational costs
Most importantly, in bad economic times, how can you leverage technology to improve your operations?
Are you doing things manually that you can automate? Are there operational inefficiencies that you can trim? Can you achieve a leaner and more lightweight operation helping you minimize expenses but set you up for scaling your law firm operations?
There are many software tools and technologies out there designed for law firms.
Is your law firm technologically up-to-date?
Maybe it will be a good time for you to leverage online video platforms to conduct your meetings, adopt cloud-based legal case management systems so you can manage your case from anywhere, look at automating your processes and workflows to achieve efficiencies and cost savings.
In most cases, a good software solution can help you improve your law firm’s operations thereby helping you drive more revenues and costs.
In good economic times or bad, do not neglect this option. This decision will help you improve your short-term law firm financial position. It’s also strategic.
7- Implement processes to collect your receivables
No matter how big or small the value of your account receivables, you should implement a strategy to engage with your customers and have them settle their invoices.
Tapping into your account receivables will be a great way to give your law firm a cash flow boost in the short-term.
If your law firm does not have a rigid policy in managing and collecting your account receivables, then you should implement that strategy as soon as possible.
Law firms are reluctant to push their clients to pay.
In most cases, we charge high legal fees and we do not want to make our clients feel that we are in need of cash or cash-strapped.
Is this mentality a reflection of the image that we sell to our clients? We are so good that we can afford luxurious and lush offices. Oh, by the way, we can afford it without you Mr. Client.
Let’s change that mentality. We run a business and we need to walk, talk and behave as a business.
A law firm is a business and a business needs to collect its accounts receivables. Period. Don’t pay, expect to get harassed…
8- Have new clients deposit a retainer fee
Small law firms looking to scale and increase their customer-base may loosen up their processes and start working on a client mandate on the basis of the client’s sole promise to pay.
In many cases, your clients will honour your payment and pay what you deserve. Check.
However, some clients will not pay you no matter the economy. Some clients will most certainly not pay you in more difficult economic circumstances.
Your law firm must consider its own profitability and financial health. You can no longer extend credit and operate primarily with your clients’ sole promise to pay.
Don’t hesitate to ask a new client to deposit a retainer. It shouldn’t be a high amount. Rather, it should be an amount high enough to protect you in case your client defaults on your payments.
Implement a process within your law firm whereby you ask all new clients for a retainer. Should a client negotiate it with you, handle it on a case by case basis.
9- Try to keep your payroll stable
In 2020, the legal industry, just like many other industries, faced an important and in some cases significant disruption.
Dealing with the economic downturn caused by the Coronavirus is stressful, emotional and very difficult to deal with.
Having said that, many business leaders say that the way companies deal with their employees during the Coronavirus crisis will impact their brands for many years to come.
For a smaller law firm, the firm’s financial position may not allow them to exercise a lot of discretion and important and perhaps drastic measures may need to be implemented to deal with the economic crisis.
If you can keep the stability in your law firm’s payroll so your employees and teams feel secure and stable, you will win in the long run. Your business success depends on it.
You may have to lay people off and that’s an unfortunate consequence of the Coronavirus breakout.
For those employees that you keep, keep them safe and secure!
10- Put some emergency funds aside
One strategy, among others, to deal with your law firm’s short-term finances and ensure you operate a financially healthy business, you should set aside enough cash to pay for your entire operations for at least three months, if not more.
This may be difficult to achieve but it’s necessary to have an emergency fund.
The emergency cash reserve should be used strictly for emergencies.
In other words, you were expecting a client payment to settle an important expense, that client payment did not come through and you have no room to push the payment date with your own suppliers.
If you tap into your emergency cash reserve, once your cash flow allows for it, you should immediately replenish what you used up so you can always have the comfort and assurance that you have at least a 3-month lifeline.
11- Get a line of credit or extend your credit limit
If you are in position to get a line of credit or extend the limits of your current line of credit, you should consider that so you can normalize any gap in your working capital.
Your line of credit should supplement your working capital whenever you are exposed to a gap in your finances.
Using the line of credit should not be done to maintain the same level of operational spend as before.
You should consider using your line of credit when you are dealing with things like filling cash flow gaps to pay a regular and constant payroll, paying critical suppliers, ensuring you are able to fund the essential law firm expenses.
If your line of credit is used with discipline, then it will save you on a rainy day.
If you are not disciplined, you don’t have a good grasp on the cash that you expect to receive from your clients, you have not optimized and cut out the excess fat from your legal operations, then you may create an additional financial burden for yourself by spending using your line of credit.
Make sure you have a solid plan.
12- Reassess your budget
In the wake of the Coronavirus economic swing, you’ll need to immediately reassess your law firm budget.
What are the major assumptions underpinning your budget that no longer hold true? How did your law firm business model pivot to adjust to the new economic realities of the market? Are you looking to change your marketing strategies to help your clients deal with the market disruption as well?
No matter how your law firm is coping, you’ll need to ensure that your budget numbers are revisited and validated.
You may have more variability in your budget due to the market uncertainties but that’s part of the game and you are not alone.
Make sure that your budget and operations remain aligned with your cash flow forecasts.
13- Take action to improve your law firm finances
There you have it.
Thirteen immediate and actionable steps to protect your law firm’s financial health in the short-term.
We understand that the sudden change in world economy caused by the breakout of the Coronavirus has been difficult to deal with.
We hope that the strategies we covered in this article will help you weather the storm and remain strong.
We are prone to making rash decisions due to economic hardships and challenges we face and the uncertainty of the future. However, we must remain committed and keep positive as the sun will shine again.
In any economic conditions, savvy businessmen and women will find opportunities. Let’s use this economic downturn to our advantage.
As lawyers, we must find opportunities where others see hardship!
Stay safe and stay strong!
How are you dealing with the economic realities in the wake of the Coronavirus? We would love to hear from you. Drop us a comment!