Managing your law firm’s cash flow
A top priority for staying in business is to manage cash flow. Most costs are paid monthly or quarterly (like staff costs and premises costs) but income does not always follow the same pattern. Therefore, the easiest way to run out of cash is to not bill clients promptly and to allow debtors to remain unpaid for too long.
There are a number of KPIs that can provide clarity on where you may need to refocus efforts to improve cash flow:
WIP days = (WIP / Last 12 months of revenue) * 365
WIP (work in progress) days are an indication of how quickly you’re able to generate fees from the work done. The lower the WIP days, the quicker the fees are being generated.
Debtor days = (Trade debtors / Last 12 months of revenue) * 365
Debtor days are an indication of how long it takes clients to pay fees. The lower the debtor days, the faster the fees are being paid. This can help you see which clients are slow, or reluctant to settle fees.
Lock up = WIP days + Debtor days
Lock up is the combination of WIP days and debtor days; it indicates how long it takes from starting work for a client to receiving cash for that work. If lock up is high, there is less cash available in the business to meet debts as they fall due, which puts the business at risk.
Here are some of our top tips for reducing your lock up:
- Review your processes to identify ways of improving billing and debt collection
- Review old WIP balances – should these balances be invoiced or is a WIP provision required?
- Review old debtor balances – is there an issue you’re not yet aware of?
- Fee earners can sometimes have better success at collecting fees than your finance team because they have the relationship with the client.