By John W. Olmstead, MBA, Ph.D, CMC
Q. Our five lawyer firm has had a very successful past couple of years. We have been growing in terms of clients, billings and revenues. However, we are getting deeper into our credit line and we simply don't have adequate cash to pay our bills. I would appreciate your thoughts on this matter.
A. Sounds like you are caught in the growth-cash flow trap. Growth puts strain on cash and increases demand for additional working capital. There have been many law firms and small businesses that were profitable - but failed due to simply running out of cash. While you cannot escape this paradox - by actively managing your cash flow (timing of the intake of cash against the outflow of expenses) you can minimize the impact of the following traps:
1. Lack of Attention Paid to Financial Management. Many law firms, especially solos, often give this task a low priority on their to do list. Servicing clients and new client development are given higher priorities. There is often a lack of understanding of financial reports and statements. Understanding financial reports such as income statements v.s. cash flow statements are important is providing early detection of potential cash problems requiring corrective actions. Law firms should develop reasonable monthly, quarterly, and annual cash flow projections as well as income and expense projections.