For those lawyers that are running a business for the first time: Spray-paint the following legal business advice in your office, hire a skywriter, or tattoo these two words backwards on your chest so you see them first thing in the mirror in the morning: “Cash Flow.”
Here’s the advice: If you want to stay in business, pay attention with laser-like focus to the money going in and out of your bank account (aka “cash flow”). You can stop reading now, unless you’re not 100% sure of the difference between cash flow, profits, and revenue.
Cash flow is a simple concept. It describes how much money flows into your bank account as well as how much flows out.
To avoid the boring specifics that will make your eyes glaze over like a donut, let me just raise the following awareness: It is entirely possible to be forced to shut your doors even if you are profitable on paper. This happens when you don’t pay attention to money in your bank account.
Cash flow is different than revenue and profits in that you can control it. Whereas revenue and profits are what they are, you can control how quickly you send out invoices and how quickly you can collect your payments.
You can also decide to pay some of your bills later rather than sooner, and you can choose to stagger payments so that not all of your big bills go out at once.
Here’s some practical advice on managing cash flow:
- Be aware of your cash position (the amount of money in your bank accounts) every day if possible, or at least multiple times each week.
- Attempt to collect your invoices within 30 days.
- Track payments with reporting, including collections reports and an accounts receivable report.
- Penalize late payments with interest charges, and incentivize early payments using discounts.
- Make sure it’s easy for your clients to pay your bills. Use electronic billing and accept credit cards.
- Be aware of the date when payroll runs. Ensure that you schedule other large cash outflows like rent, credit card bills, and large one-time expenses so that they don’t hit your bank account on the same day.
Now, for the boring stuff with eye-glazing potential!: Below is a quick summary of the difference between cash flow, profits, and revenue:
Revenue only reports how much you’ve earned on paper over a specific period. It may not reflect the cash you’ve received, depending on how your accountant is keeping your books (we can save cash vs accrual accounting for another day).
Profits are your revenues minus expenses. Again, depending on how your books are set up, you may HAVE to book an expense in one month even if you don’t pay it out in the same month.
These accounting rules are why it’s critical to understand your cash flow in addition to your revenue and profits.