How to Look at Your Firm’s Cash Flow

Thursday, June 20th, 2013 | BIPro | Scott Randall

To gauge your firm’s financial health, you need to watch its cash flow. Since various facets of a legal business affect cash flow, we’d like to quickly discuss several important cash flow metrics lawyers need to track.

Work In Progress (WIP)

Financially healthy firms systematically move all their work from unbilled to billed. But sometimes work stays stuck “in progress” much longer than it should. You need to find that work and get it unstuck as fast as possible.

Accounts receivable aging

Invoices that age unchecked are a drag on cash flow. Firms need to minimize amounts that show up in the “60 days” and “90 days” columns of their accounts receivable aging reports.

Outstanding hard costs

You write checks to pay for the services of expert witnesses, or for filing fees, or other outlays to third parties. You must then remember to bill those outlays back to your clients. Until you do, you’re out of pocket.

Effective rate of return per hour per attorney

Let’s say you bill $350 per hour. The actual return to the firm may be lower. In some cases, such as with flat fees, the return may be higher. Driving your firm’s effective rate of return higher can make it financially healthier.

Historical trends

When you measure your metrics over time, you can find trends in your firm’s performance. You will want to continue profitable trends into the future and stop unprofitable ones as soon as possible.

How do I find this information quickly?

Your accounting system holds the information you need to calculate these metrics. But you then need to gather the data, calculate the metrics, and render them visually so they’re easier to understand.

Many lawyers don’t have time to do this, so we upgraded BI Pro using “blink technology” and “spark lines,” tools that quickly show what firms need to focus on. Check out the following graphic to see what we mean.

Blog pic

Consider just three things this graphic tells you more quickly than a pile of reports could:

  1. The top shows an accounts receivable trend spark line for one calendar year, with all the peaks and valleys normal operations causes.
  2. Below the spark line is a group of colored boxes. The size of a client’s colored box correlates to how much a client owes compared to the firm’s total accounts receivable. The most-billed clients occupy the top left corner, while the least-billed sit in the bottom right.
  3. The quicker a client pays invoices, the greener its box. The slower it pays, the redder its box.

Visualizations like this don’t tell the whole story, but they do quickly tell lawyers:

  • what aspects of the firm’s cash flow need their attention
  • where in the firm’s financial system to dig for the information they need

We created these visualizations to speed up the process of finding cash flow issues, so that you can more quickly resolve them.

Want to find out more about BI Pro visualizations like this one? Check out these links, or contact us.

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