Some lawyers still debate whether law is a profession or a business. To believe that law is the business of providing services to individuals and organizations does not take away from the lawyer’s professionalism – it merely means lawyers should approach the law in a businesslike way. When it comes to cash flow, your banker certainly agrees.
Lawyers have a tendency to view bankers almost as adversaries, willing to lend money only if you don’t need it. The reality is that lawyers and law firms are generally attractive customers for banks desiring to grow. Banks value lawyers as having good financial prospects, relatively low risk, and good potential for new business referrals.
The key for your firm to use banks successfully is to establish an ongoing relationship so that the bank understands your law firm’s business dynamics and is comfortable with your ability to deal with the risk factor in any loan or other banking transaction.
Banks view and understand a law firm as a business, with cash flow, receivables, revenue and profits. Lawyers need to educate their bankers on how their business operates, openly and candidly, in order to build up a relationship of trust.
Managing cash flow effectively and developing and using a cash flow statement make the foundation of an effective banking relationship for your firm. The cash-flow statement can have many names: a cash-flow budget, a statement of cash or a forecast. Whatever the moniker, this statement is important for review on at least a monthly, if not more frequent, basis. It is the single most important financial statement in any business.
Effective cash flow management often comes down to the steps any lawyer can take to get funds into the bank account as quickly as possible. Begin with more efficient and creative billing on your end – for example, “aging” your outstanding invoices to see which have gone unpaid longest, billing one fourth of the alphabet each week to stagger incoming collections, billing on the 25th of the month so that clients receive and pay statements before month’s end, or billing right after a particularly successful outcome.
Combine these steps with the following six common sense tips for using your bank efficiently. Over time, they can make your firm more successful – and your bank more willing to help you when you need it:
1. Don't wait to deposit cheques
This is the first rule of cash flow management. Too many catastrophic events can happen while a cheque is awaiting deposit.
The client may, in the interim, become angry, for whatever reason, and stop payment on the cheque. The cheque may reach your client's bank at a time when the account is overdrawn. The client may have been named as a defendant in a lawsuit for which attachment procedures are available. Because of this, the client's bank account may be "marked" for a sum large enough to cause the presentation of the cheque you are holding to be rejected. And, as seen recently in New Orleans, the client’s bank may be wiped out, with little or no paper trace of funds that will lead to long delays to reconstruct the bank’s books.
In each of these cases, a cheque that had been deposited immediately would have cleared the client's bank and been credited to your account.
2. Maintain a high average daily balance
Most banks calculate the "average daily balance" in your bank account. This is one of the most significant bits of information with which a bank works in analyzing a loan request, so you want to maintain as high a balance as possible.
This can be done either by keeping a large sum of money in the bank or by keeping limited funds in the account for a longer period of time. You can keep funds in the account longer by depositing revenue immediately upon receipt and spreading the payment of bills throughout the month. Do not pay your bills all at one time: This will cause an exaggerated dip in your account balance rather than provide an even flow of funds.
3. Consider an automatic bank sweep
Banks provide for an "automatic sweep" on a daily basis. Establish a minimum amount of money, such as $2,500, to remain in your general account. The exact sum depends on the amount of cheques and deposits that pass through your bank account each month. Then, instruct the bank to segregate all funds in excess of this amount at the end of each day and "sweep" or transfer those "excess" funds into a money market (interest bearing) account until needed. The bank can also be instructed to call you, or to automatically transfer funds into the general account from the money market account in the event the balance goes below the established minimum amount.
4. Negotiate immediate access to deposits
Some banks place a "hold" on funds deposited with them until the funds have cleared through the banking system. This may be as long as seven days. However, you can negotiate with the bank so that you have immediate access to your deposited funds.
5. Deposit all cheques from clients
Do this even if the amount received does not match the amount due per the statement. Make a photocopy of the cheque. After making the deposit (and do it in person), call the client and ask for an explanation of the difference. You will ultimately reconcile the amount paid with the amount due; however, in the meantime, you will have deposited and benefited from the amount sent to you.
The only exception is when there is a disputed claim, and a cheque is marked “paid in full” with the cheque amount being less than the amount owed to you.
6. Use trust accounts effectively
Work with your banker to set up an effective trust account withdrawal process. Flat fees or retainers can be withdrawn from a client’s trust account as specified in the engagement agreement. Deposit retainer fees into a general account if the agreement specifies your exclusivity (taking you off the market), or split it into a non-refundable retainer and a balance withdrawn as the work is performed. When your bank understands the method you use, it avoids waiting for the client to say "yes" after the fact and allows you to get the money sooner.
Lawyers should look for a bank that gives them the types of services and responsiveness they want. An effective bank can handle both essential financial transactions as well as a wide range of other services that make law firms more efficient businesses.
Banks and law firms are both professional service businesses and can develop mutually beneficial and effective business relationships if they work at them. When your need for help is unexpected and great – for example, an emergency loan to cover funds for rent, payroll, supplies and a new office in the event of a fire, flood or other disaster – the cash flow management services you use at your bank can pave the way for the loan that will keep your firm afloat.
Edward Poll (edpoll@lawbiz.com) is a certified management consultant and coach in Los Angeles who coaches attorneys and law firms on how to deliver their services more profitably. He is the author of Attorney and Law Firm Guide to the Business of Law: Planning and Operating for Survival and Growth, 2nd ed. (ABA, 2002), Collecting Your Fee: Getting Paid from Intake to Invoice (ABA, 2003) and, most recently, Selling Your Law Practice: The Profitable Exit Strategy (LawBiz, 2005).