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Is your firm’s checkbook balance the management metric that outweighs all others?
We all know cash is critical to running a successful law firm. But firms usually get into trouble when they place too much significance on cash balance when measuring their financial health. While it’s typical for a young firm to use this approach during their start-up in order to survive, more established firms need to adopt a longer-term view of managing cash.
If your firm exists in an environment where it just made its last payroll but doesn’t have enough cash on hand to make the next one, you may have a problem. A well-run firm can consistently meet payroll and pay operating costs and trade creditors on time.
When a firm cannot pay bills on time, the staff and attorneys know it. It starts when someone tries to schedule a deposition or order office supplies, and the firm is in COD. Not long after, the firm makes payroll late or (heaven forbid) misses a payroll. These are all loud and clear signals to everyone to look for a more stable position.
Problems with a short-term focus
Firms that focus heavily on short-term cash balances spend so much emotional energy scrambling to meet payrolls and pay critical vendors. This same short-term focus also has these firms sitting back and relaxing when they have a lot of cash in the bank since they believe things are great.
This exaggerated pessimism or optimism often influences decision-making at the firm, similar to the boom and bust mentality. For example, a great new hire is suddenly available, but the firm decides to refrain from making an offer because money is low. On the other side of it, the money in the bank account looks good, so management pays all the bills and even decides to make a distribution to the partners... But then the firm finds itself struggling to make the next payroll.
Falling into this trap is easy to do. When a firm does nothing to get out of it, an erosion of confidence and a lack of trust in management occurs.
We encounter firms who struggle in this area and have that it is usually attributable to one or more of the following issues:
- Undisciplined managing partners;
- Pressure to distribute from the equity partners;
- Financial trouble;
- Lack of financial policies (reserves, capitalization, debt), procedures, and processes.
Avoiding these issues is simple in many instances. In others, it requires a change of philosophy, a change in financial management responsibilities, better systems and processes, and a commitment on the part of the equity group to a longer-term view.
If your firm is experiencing any of these challenges or your instincts tell you that it is time to improve your firm's cash management and financial thinking, we suggest getting outside help. Most law firms will find it difficult to solve these problems internally.
PerformLaw provides law firms with the help they need to build a great law firm. We work with many successful firms and appreciate what it takes to run a successful quality organization.
Our approach is not judgemental, but it is objective and honest.