Cash Flow Planning Pointers

12/1/2016 - By Zachary Farrington

Attorneys are often surprised that even with revenue coming in, they can still come up short on cash. Problems occur because cash coming in often lags cash going out. Profits may be reported, yet the practice still experiences a short-term cash shortfall.

The following example clearly illustrates how a law firm can run into a cash flow crunch — even when there is more money flowing in than out.

Income Statement: Month 1

Billings $75,000
Costs $65,000
Profit $10,000

Cash Flow Relating to Month 1
                                                    Month 1        Month 2      Month 3       Total

Receipts                                       $20,000        $35,000      $20,000      $75,000
Outflows (salaries, suppliers etc.)  $40,000        $20,000      $5,000        $65,000
Net Cash Flow                             ($20,000)      $15,000      $15,000      $10,000
Cumulative Cash Flow                 ($20,000)      ($5,000)     $10,000      $10,000

This clearly shows that receipt of the $75,000 in billings is spread out over time and that the $10,000 profit for Month 1 will not fully show on the books until Month 3. As a result, a serious cash shortfall will be experienced during Month 1, when inflows total $20,000 and cash outflows reach $40,000.

The trick to cash flow planning is to base your billing forecasts on a realistic estimate of billing realization — not only what you think you’ll bill, but also what you realistically think you’ll be able to collect and when. Here, there is merit in compiling “worst case” projections to complement “most likely” or “best case” forecasts — and then plan accordingly.

Finally, remember that a cash flow forecast is not intended to be static. You will need to monitor and adjust your forecast in response to actual performance.

Cash flow can make or break a practice. Contact our office for help in fine-tuning your projections and procedures.

 

Related Posts