Practice Management

8 Tips to Optimize Your Law Firm's Cash Flow

Catherine Brock
Catherine Brock
February 6, 2023

Your law firm can have a solid book of clients, an effective marketing plan, and the best attorneys in town. But without sufficient cash flow, the business can’t thrive and grow.

What Is Law Firm Cash Flow?

Cash flow is the net cash a law firm generates (or consumes) during a reporting period. If you use cash accounting practices at your law firm, the formula for cash flow is simple.

  1. Determine your net income. Add revenue and then subtract total expenses, such as operating expenses, taxes, and interest on debt.
  2. Add non-cash expenses.
  3. Subtract the cash draws you take as an owner.

The cash flow formula gets more complicated in accrual accounting. This is because you record income when you bill rather than when you get paid. In that case, you'd calculate cash flow using the steps below.

  1. Determine your net income.
  2. Add non-cash expenses.
  3. Subtract the net increase in working capital (your current assets less current liabilities).

Cash flow is essential to the health and longevity of your law firm. Without consistent, rising cash flow, you may have trouble covering business expenses on time. You would also find it difficult to invest in growing your client base through paid initiatives like advertising.

Read on to learn how to increase the cash flow of your law firm, plus quick steps you can take to alleviate immediate cash flow problems.

How to Improve Cash Flow for Your Law Firm

You can greatly improve your law firm cash flow with strategic changes to your billing process. The primary goals are to raise your billing collection rate and shorten the time it takes to collect on invoices. The eight strategies below focus on these outcomes.

1. Create Goals

Goal setting is important anytime you set out to optimize law firm management practices. A defined goal keeps you focused by giving you a measurable target to reach.

First, review your financial reports to identify any billing inefficiencies. You may see a rising tally of unpaid invoices, clients regularly paying invoices beyond your stated terms, or both. Depending on the depth of the problems you uncover, you may have to prioritize your next steps.

Starting with your highest-priority issue, document where your firm stands today. Perhaps you normally collect 85% of amounts invoiced. Or maybe the firm has some late payers, which pushes your average account aging beyond 30 days.

Once you know your firm's performance today, you can set specific and time-bound goals. An example would be: Raise billing collection rate from 85% to 90% over the next 90 days. Or, reduce the average time to collect from 40 days to 25 days over the next six months.

2. Be Diligent About Time Tracking

A thorough, understandable invoice gets paid faster than a vague bill that doesn’t explain charges. And to create a proper law firm invoice, you must have a reliable system for tracking time.

As a rule, always record your time at the end of each task. Do not put it off. This afternoon, you will have forgotten what you did this morning. If you wait to log time, you'll end up scouring your outbound emails and phone calls to remember what you worked on. That's not an efficient use of your time, and it leads to untracked billable hours.

If manual time-tracking is too cumbersome, try using case management software like MyCase that logs your activities and prompts you to add time for those activities.

3. Accept Online Payments

Expediting bill collection is a tried-and-true strategy for increasing cash flow. One survey of legal industry professionals found that those who accept payments online get paid 39% faster on average.

If you don't accept online payments, you have to rely on clients to write a check and mail it. Then you wait for the postal service to deliver that check. Once you receive the payment, it may take a few more days for the bank to release the funds.

Online payments are vastly more efficient and convenient, for your firm and your clients. You send an invoice with a link, your clients click through and enter their payment details, and the firm gets paid. The entire process can take minutes, rather than days.

4. Invoice in a Timely Manner

Timely invoices also get paid faster.

For lawyers who bill at the end of a matter: Clients tend to feel most satisfied with their legal representation the day their case is resolved to their satisfaction. As time passes from that date, the enthusiasm wanes, along with the motivation to pay the invoice. Invoice immediately, when most clients are ready to pay for the work. If you wait 30, 60, or 90 days, there's a far greater chance the bill will go unpaid.

Attorneys who invoice throughout matters, such as on a monthly basis, should explain their billing cycle and processes during client intake. Then, track time and send invoices on a regular basis as promised, and let clients know of any new bills.

5. Automate Your Cash Flow

You can also simplify your billing process by supporting recurring, automated payments. Ideally, you'd include credit card authorization forms in your onboarding paperwork and encourage all clients to set up automatic payments. This way, you're not reliant on the client actively paying your invoices. You can process amounts due from your side.

6. Build a Clear Accounts Receivable Process

Your law firm's accounts receivable process encompasses all the actions taken to collect payment on an invoice. That includes the invoice itself, payment confirmations, upcoming due date notifications, and past-due reminders, plus the communication and enforcement of late payment terms.

Document your accounts receivable process and implement it consistently. Be open to testing changes to that process, one at a time. For example, if you are currently sending upcoming due date reminders seven days out, try a five-day notification instead. Or experiment with stronger language on your past-due reminders.

Your goal is to refine the accounts receivable process as much as possible. The more you know about motivating clients to pay quickly, the better you'll be at increasing cash flow.

7. Let Your Tech Tools Work in Tandem

Integrating your case management, time tracking, billing, and payment collection tools delivers big benefits for your law firm. For one, a comprehensive system that shares data across different applications is more efficient. You won't have to cut and paste data or juggle multiple programs and windows to see your law firm's complete financial picture.

Plus, integrated software can provide deeper business insights, payment reporting, and law firm financial metrics. For example, you can use an integrated payment tool to tag and organize your invoices, which allows for thorough analysis of your law firm's income. You can delve into which client and case types are paying on time and which aren't.

This analysis is actionable in various ways. For example, when you know the characteristics of high-value clients, you can target them more directly in your marketing efforts.

8. Alleviate Your Security Burden

Clients expect digital payment options, and more law firms are evolving to meet that expectation. The shift into digital payments, however, also requires modernized security protocols.

Too many professionals around the country are jotting client credit card numbers down on sticky notes. Those notes, even kept behind locked office doors, are a security risk. In the wrong hands, documented credit card numbers can create serious, negative outcomes for you and your clients.

Carelessness with client account numbers also violates credit card company requirements. Any business that accepts credit card payments must adhere to Payment Card Industry (PCI) security standards. Violating those standards could result in fines plus the inability to accept card payments in the future.

It's not safe to store account numbers digitally on your computer, either. A clever cybercriminal can access that data via the internet.

Fortunately, there is a way to shift much of the security burden to a provider. Simply partner with a quality payments provider that doesn't require your law firm to collect card data. Instead, clients can enter card data themselves, into a secure portal. The data is then stored in an encrypted card vault. You'll want a payments provider with PCI Level 1 security, which is the highest level of internet security.

A good provider will also offer a comprehensive PCI compliance overview, and guidance to help your firm get and stay PCI compliant.

What to Do When Facing Cash Flow Issues

If you haven't been managing your law firm cash flow closely, you may not realize there's a problem until you have bills due—and no cash to pay them. And while it's essential to optimize your billing processes, that won't fix a cash flow shortage overnight.

So, in the face of an immediate cash shortfall, you'll have to pair the above steps with one or more short-term strategies. Your options include liquidating underused assets, applying for government assistance, and securing a line of credit. Let's discuss each of these.

Liquidate Underused Assets

Selling assets can generate quick cash for your law firm. The challenge is reviewing your financial accounts and selecting which assets make the most sense to liquidate. You don't want to sell any equipment or real estate that your firm currently uses to generate income. That would be counterproductive. But you can safely part with old electronics or empty office space no one is using.

Apply for Government Assistance

Federal, state, and local governments are primary distributors of business grants. There are grants available to help small businesses navigate financial crises, and grants designed specifically for law firms.

The advantage of a grant is that it is a gift. You do not have to repay it later and there are no interest charges.

You can start your search for a government grant at the website

Apply for a Line of Credit

A line of credit can function as an emergency source of cash for your firm. If a major client doesn't pay an invoice on time, for example, your firm can draw from the credit line temporarily to make ends meet.

Shop around with physical and online banks to get the best terms possible. Note that some forms of government assistance and your firm's existing lenders may have restrictions on new debt. Familiarize yourself with any restrictions that may apply to your firm before opening a new credit account.

Manage Your Firm's Cash Flow Capabilities

Optimizing bill collection is a primary cash-flow initiative. Fortunately, there are technology solutions to support billing optimizations that will increase cash flow. MyCase, for example, allows for detailed, task-specific time tracking that flows directly into client invoices. You can also integrate MyCase with LawPay to offer PCI-compliant, client-friendly online payment options.

LawPay and MyCase, in turn, can share data with Quickbooks and other accounting programs. With your data in one place, you can better understand your law firm's cash flow trends. You need that visibility to monitor changes and identify how your billing optimizations are benefitting overall cash performance.

To learn more about how these applications can improve your law firm's cash flow, contact us today.