Cash Flow Management for Law Firms Amid COVID-19
If there ever was a time you wondered what saving your business might look like in an economic downturn, this, unfortunately could be it. BUT I’m here to BAT for you and be a heavy hitter when it comes to the important business concepts in these uncertain days!
One of the first things to suffer in a business is cash flow. And cash flow is also one of the first things to render a law firm (or any business for that matter) completely debilitated. There’s a reason why it’s pegged the “silent killer” of businesses: Mis-financing (of structured debt), Inventory Imbalances, Poor Expense Control and Poor Accounts Payable and Receivable Management.
Let’s take a look at these a little more closely.
Mis-financing – This happens when a business takes out short loans to pay for long-term assets. There are a few problems that come with these types of loans. You end up paying out more cash to pay off the loan/s than your assets can keep up with. (In other words, your assets don’t get a chance to do “their job” to pay off the loans). Also, continued borrowing eventually results in a dwindling line of credit to draw from, which then puts stress on whatever (if any) cash flow you still have.
Proper financing means you have enough cash with retained earnings and long term debt to take on the larger assets of the business – no question. You can keep track of Mis-financing by keeping track of your balance sheet; gross fixed assets, long term debt, and retained earnings.
Inventory Imbalances…for Law Firms? – As you know, Law Firms don’t have inventory they must turn over and resale, but they do have a type of inventory which is fairly related to revenue: business inquiries for the month, pending prospective clients and number of open client matters.
By nature, Law Firms get pulled into a lot of “mind busy” tasks, which means it’s that much easier to get stuck working in the business instead of on it. Don’t get so engrossed with a certain pool of clientele or demographic that you forget to “anti-up” for all active opportunities coming your way.
Poor Expense Control – Like a bandaid, I’m just gonna “rip it off”, you may have to let a few workers go. Period. In order for your business to survive, you have to do what’s best for it’s sole survival, regardless of how you may feel about it. Letting them collect may be better for them and your business.
Use the mirror technique, examine the number of open client cases you have now, pending prospective clients (and their timelines) and how they balance out with the number of your partners and co-workers financially. Like a telescope pointed to the moon, you may have to take a few measurements and make a few adjustments to get the right workflow going. Take your time. Review all your related KPI’s before making any final decisions.
Poor Accounts Payable and Receivable Management – You really can’t go about things the same as you have before, because the economic climate has changed. Yes, you will still (and will always) remain fair and gracious with clients and vendors. But… with a few addendums. If you can rightfully do so and it won’t damage your vendor relationship, consider paying the minimums on these accounts. And to maintain a good balance of receivables, offer a small break or discount to clients who would pay larger retainers to get started, or square their bill early. They will get something out of it and so will you.
A few more business tips to consider…
- Be sure to read the fine print of every credit card and loan you have or loan that you are about to commit to, especially if it’s related to the business. The economy is extremely fragile right now and the fine print on something could make or break the business right now.
- Do some brainstorming. There are plenty of creative things you can do, unconventional activity could keep your business afloat. For instance, getting a loan through Amazon who has same day approvals.
- Check your municipal, state and federal agencies for any sort of COVID-19-related small business grants. Stay informed and find out what’s available.
- Network with some other firms in order to stay informed on important policy changes or issues you may not yet have heard of.
- Are there some bills you can put off for a while? Perhaps now is a good time to look into deferments or completely eliminate some nonessential services. I mention in the video, appsumo. It is one place I have shiny object syndrome. Look at apps you have signed up for that you may be able to stop temporarily or completely, if you don’t use them.
- Weigh the options of giving out flextime or parttime to employees,
- Consider canceling special business training programs until you feel more financially stable to take them on.
When all is said and done, every Law Firm runs a little differently and in some cases, a LOT differently. YOU are the one who knows it’s in’s and out’s, what’s best. You make the decisions on whose advice you’ll seek and who to listen to.
If you’re an accountant or bookkeeper and need more guidance, please join our Facebook group QB Community Live! It’s a safe place to ask any question. I co-admin group, and I’m here to help. Our motto is, Together We All Succeed! #TWA$