In their 2012 song Make the Money, hip hop duo Macklemore and Ryan Lewis rapped:
Make the money, don’t let the money make you
Change the game, don’t let the game change you
While they were talking about the personal and moral hazards that come with money and fame, they could just as easily have been referencing the challenges small firms face in managing cash flow.
Cash flow can make or break a business—82% of businesses that fail cite cash flow problems as a factor in their failure.
Too often, solo, small, and medium firms don’t follow Macklemore’s advice and instead spend a significant amount of time letting their cash flow determine everything from when they hire to the types of cases they take to capital expenditures.
It doesn’t have to be that way.
The right understanding and management of your law firm’s cash flow can set you up for both growth and financial stability. Let’s talk about why.
Why is a healthy cash flow important?
Cash flow isn’t the only metric you should use to understand your firm’s performance, but it’s a critically important one that often gets overlooked in favor of flashier measures like revenue or profit.
Before we get too much further, let’s go over a few definitions:
- Cash flow: the overall inflows and outflows of money in a company
- Cash inflow: funds received from invoiced services, product sales, investments, financing revenue, etc.
- Cash outflow: funds spent on accounts payable, capital expenditures, fees, etc.
- Revenue: money earned from the sale of products and/or services
- Liquidity: how easily assets can be turned into cash at a fair market value (i.e. without being discounted)
- Profit: total funds left after deducting expense totals from revenue totals
Unlike revenue, cash flow isn’t just a straight numbers game. For service-based businesses like law firms, the timing of cash inflows/outflows can be just as important as the amount of money rolling through the practice.
Need an example?
A Very Fine Law Firm’s invoicing schedule
A Very Fine Law Firm brings in enough annual revenue to cover its total annual expenses. Their billing system is set up to make invoices due on the 15th of every month. But payroll and loan repayments are scheduled for the 12th of every month.
In this scenario, the partners at A Very Fine Law Firm have dramatically increased the likelihood that they won’t have the money they need to meet their obligations at the time they need to meet them.
While they may have enough money eventually, their inability to pay expenses promptly and keep a reliable amount of cash on hand can have a number of negative consequences, including:
- Late payments that can potentially damage business credit
- Fees and fines related to late payments
- Damage to credibility and reputation
- A decreased ability to accurately forecast expenses
- Missed investment opportunities
- Stress and wasted time related to managing late payments
By contrast, optimizing your processes to ensure a steady, reliable cash flow can help your firm:
- Set aside funds for upgrades to offices, equipment, and technology
- Confidently meet staffing and hiring needs
- Identify opportunities for cutting costs
- Make strategic advertising and growth decisions
- Maintain a “rainy day” cash fund for emergencies
So, how do you know if your firm is managing its cash flow well?
Signs of healthy cash flow
Firms with strong cash flow management processes:
- Know how much they spend on fixed expenses (rent, utilities, etc.), payroll, and debt remittance each month or quarter
- Have the ability to accurately forecast both revenue and expenses
- Demonstrate a high rate of on-time payments from clients
- Accept multiple payment options
- Provide timekeepers with tools that automatically track billable hours
- Have efficient collections processes for following up on unpaid invoices
Your firm doesn’t have to be a poster child for each of these bullet points to have a healthy cash flow. Every business has natural ebbs and flows in collections, revenue, and expenses.
But smart practices—and profitable ones—look for patterns and get ahead of them.
Use Rocket Matter Pay to improve your cash flow
The traditional financial model for most solo or small legal practices involves monthly invoices with payments collected mostly by check (either electronically or via a mail carrier). If you don’t stay on top of these processes, it’s easy for missed payments and open invoices to get lost in the shuffle of daily business.
And even if you do stay on top of your billing, unless it’s automated, you and your team will likely spend significant amounts of time adjusting prebill invoices and following up on collections.
Rocket Matter Pay, a key feature of Rocket Matter’s legal practice management software, simplifies all the processes that impact your cash flow.
Rocket Matter Pay enables paperless, web-based invoicing and allows your clients to pay immediately using multiple types of credit cards or eChecks. Rocket Matter Pay also supports recurring payments and payment plans by letting your clients store payment methods online, which makes paying an invoice as quick and easy as a few keystrokes.
More reliable and timely payment of invoices isn’t the only way Rocket Matter Pay helps with cash flow, though.
Unlike some payment processors who can hold payments for days, Rocket Matter Pay can fund your account in as little as 12 hours. This means that if you’re currently sending out paper invoices at the end of each month and it takes an average of 30 days for those invoices to be paid, using Rocket Matter Pay can shift your billing cycle from four to six weeks down to four to six hours.
That’s a huge difference.
Another bonus? Rocket Matter Pay is always transparent about the rate fee for each type of card. And because we want to help you improve your ability to manage your cash flow, we never add surprise fees to your account.
Rocket Matter reporting features
Besides simplifying your billing and payments system, one of the biggest advantages Rocket Matter’s all-in-one practice management software provides is a powerful set of reports that help you understand all your firm’s finances.
Whether it’s productivity per matter, productivity per user, origination reports, or collections analysis, our standard platform delivers robust analytics that help you understand where your firm has opportunities to improve efficiency and grow revenue.
Our premier tier offers additional business intelligence tools that allow you to set and track custom KPIs, so you can collect the data you need to make decisions strategically.
Get the Rocket Matter advantage
If you want to learn how Rocket Matter’s practice management software can lessen your administrative load while improving your cash flow and driving revenue growth, sign up today for a free trial or schedule a demo.