A lack of sufficient cash flow is one of the most significant issues which is currently causing law firms to be placed under duress.
A lack of available cash flow in a firm results in a number of issues, including a law firm struggling to pay creditors, employees of the firm, and the Partner/s of the firm.
The problem is, for most Partners, keeping track of their expense and revenue items, each operating according to its own highly uncertain timetable, can be a difficult and stressful exercise, and this is why cash flow management is failing to be done properly.
Preparing monthly cash flow projections is just one of the things the Partner/s can do to put their firm on a steady cash flow footing.
What many firms fail to recognise is that profit and loss statements and balance sheets prepared from their internal accounting program focus on book profit, not cash.
Whilst it is vital to focus on the firms’ profits and asset position, it is also important to understand the flow of cash in and out of the bank account.
Cash Flow Improvement Formula
The cash flow improvement formula for a healthy firm should aim to drive debtors down, drive stock holdings down and maintain creditors at terms.
By doing so surplus cash exists to make asset purchases, pay debts, and pay dividends and drawings to owners. Cash flow projections should be prepared for one to five years as a minimum, depending on the firms’ needs.
I would also advise firms set their credit terms for clients carefully and ensure that they follow up with clients if they exceed these terms.
By the same token, pay your creditors on time, taking advantage of their credit terms and any discounts offered for early payment.
To discuss this article further contact Matt Schlyder on 07 3833 3999 or email firstname.lastname@example.org.