Running a Law Office means managing your cash flow.
The reality is you have to front capital for disbursements and overhead before invoicing your clients. Some firms may get paid right away, but usually you may have to wait for your money.
Cash flow exposure can be assessed by your WIP (work in progress), A/R (accounts receivable) and disbursements still unbilled. This is simply work you have done and not been paid for yet, plus any amount of money you have advanced to other parties on your clients’ case.
To calculate your exposure factor for a month, divide the cash flow exposure at months end by the amount of disbursements and fees collected in a given month.
Knowing your exposure factor for a given month is not particularly useful, however the trend that develops over a number of months, will produce the information you need about the efficiency of the cash flow in your practice. Up is not good in this case, you want to get this exposure factor down.
Determine your average exposure by identifying your exposure number on the last day of several months. You will find the average exposure factor by dividing your average exposure by the average collections in the same period from each month’s outstanding collections in WIP, Accounts Receivable and disbursements that remain unbilled.
Depending on your practice you will experience different exposure profiles.
- Contingency practices have a much higher WIP exposure as fees are not billed until the matter settles; the disbursements exposure will be dependent on if you bill disbursements as your case progresses; accounts receivable exposure should be virtually non-existent as your bills are satisfied from the proceeds of the settlement.
- Transactional practices, (real estate or commercial), typically experience a more turbulent WIP (short term) and unbilled disbursements exposure, however A/R should be lower, as the files should be satisfied when the transaction closes.
- In an insurance defence practice there are typically monthly provisional bills that may be able to preserve its WIP and disbursements that have not yet billed exposure minimalized, A/R’s will ride on the speed their clients pay.
- General and family law practices often experience higher exposure factors, this is emphasized if the lawyer has a relaxed retainer policy, accumulates disbursements with less consideration to the effect this has on cash flow, failing to regularly bill coupled with a weak A/R follow-up process.
Generally, it is best if you maintain a low exposure factor as possible. Here are some suggestions on how to do this:
- Avoid work that potentially will not remunerate, unless you thoughtfully decide to take it pro bono.
- Only start files when you have a healthy retainer in trust.
- Maintain a low WIP by reviewing regularly and billing it quickly.
- Manage your unbilled disbursements; pay from trust and billing clients when possible.
- Keep your A/R’s down by ensuring as fast a payment as possible, best is out of funds in trust, and always pursue your receivables with tenacity.
Accounting programs make it “easy” to produce monthly or even more frequent bills and aged WIP, unbilled disbursements and A/R reports, which you can use as the basis for your billing and collections activities. However the process for reviewing these is typically cumbersome and often paper driven; the challenge here is how do you get this information in the hands of the right people and back again quickly and efficiently?
The solution is to avoid paper based communication and adopt an electronic method of reviewing and collaborating on this information to ensure the cash flow exposure is minimized.
Nikec Binder is an electronic version of the traditional three ring binder with a table of contents, tabs and electronic documents that can be instantly assembled using the folder structure on your computer where the reports are generated and saved. These document collections can be annotated and returned quickly and easily ensuring faster billing.
Nikec Docstore makes your electronic documents available to / from anywhere the internet can be opened, ensuring secure and instant accessibility to all the documents you need. If a document or folder of documents needs to be collaborated on, you can keep the conversation managed in a secure environment – no more email!
Nikec HUB can be used in conjunction with Binder and Docstore offers a customizable Extranet interface a number of Document Management Software integrations plus an- open API to allow the reporting of up-to-date billing information. NiKec Hub is an extranet that provides firms with a secure and efficient way of managing information while enhancing communications and collaboration with colleagues and clients.
For more information on how to reduce your cash flow exposure factor using the effective and efficient tools above, contact Greg Nicholls at greg.nicholls(at)sai.ca or call 1-888-366-8725 ext. 226 in the USA or 1-800-667-0332 in Canada.