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Cash Flow Enhancements to Increase Law Firm Revenue

Written by Erika Winston

5 min read

Cash flow and revenue go hand in hand within a legal practice, so attorneys must strive to maximize it in order to maintain a successful law firm. Cash flow refers to the movement of money into and out of the practice and includes such things as client payments and office expenses.  

Positive cash flow allows firm leaders to make strategic plans and financially invest in the firm. But inadequate cash flow often leaves firms without the ability to manage regular expenses, which underscores the importance of improvements. As attorneys seek to boost their law firm revenue, they should consider these cash flow enhancements:  


Current Cash Flow Analysis

All law firm leaders need an understanding of the status of their firm’s current cash flow as the starting point for making any enhancements. Attorneys should use detailed accounting records to map out the ebbs and flows of their cash flow over a six-month period. This information will help identify any seasonal trends or slow periods that may be negatively impacting cash flow.  

With current and accurate data, firm leaders can better forecast and strategize ways to address downturns before they become problematic for the firm. Attorneys need a clear understanding of their firm finances to ensure that their expenses consistently fall below revenue. An analysis of current cash flow provides that important insight.  


Alternative Payment Arrangements

The traditional billable hour may not be the most effective payment option for enhancing cash flow. As such, many attorneys have discovered that alternative payment options, like fixed fees and payment plans, prove more effective at securing timely and complete payments that increase cash flow.  

When clients are given a greater level of flexibility in their payment options, firms are more likely to get paid in full. This occurs for a variety of reasons. For one, legal fees can be prohibitively expensive. Fixed fee arrangements provide clients with an up-front cost, so they are not blindsided by unexpected costs throughout their legal representation. Payment arrangements allow clients to divide their legal fees into smaller more affordable amounts.  

Along the same lines, law firms can also use incentives as tools for enhancing cash flow. For example, attorneys can offer clients a small discount or other perks for paying their invoices by a particular date. The higher the collection rate, the greater the opportunity for enhanced cash flow.  


Electronic Invoicing

Regular and timely invoicing also enhances law firm cash flow, and this is best accomplished with electronic invoicing. Firms should have an electronic billing system in place that helps them manage all aspects of accounts receivable and easily collect payments from clients.  

With electronic invoicing, firms can send billing statements to clients quickly and efficiently instead of waiting for slow and unpredictable mail options. This also translates into faster client payments and greater cash flow into the firm.  


Automated Payments

Automated payments offer another way for law firms to make it easier for clients to make payments. Through the use of automated credit card or ACH payments, firms can better promote timely payments by automatically transferring funds directly into the firm bank account under an established payment agreement.  

Cash and check payment methods are becoming outdated, and automated payments have become the norm across various industries. Though the legal community has been slow to catch up, automated payments are expanding in usage among law firms because many clients prefer their convenience and consistency.  


Maintain a Viable Cash Reserve

A rainy-day fund is not solely applicable to individuals. Law firms should also have a cash reserve in place for times when incoming payments take a hit. Attorneys can do this by stashing away funds during periods of higher revenue and leaving it untouched. A good rule of thumb is to maintain at least three months’ worth of business expenses in the cash reserve and update the amount as firm expenses change.   

The pandemic made the importance of a rainy-day fund extremely obvious. As firms nationwide had to suddenly interrupt operations, it was cash reserves that helped them sustain until revenue began flowing into the firm once again. Enhanced cash flow requires management, forecasting, and thoughtful planning.  


Cash Flow KPIs

Law firms need Key Performance Indicators (KPIs) that are applicable to their cash flow. For instance, one indicator could track the average number of days for outstanding invoices. With this type of information, law firms can implement improvements that increase the cash flows of the practice over time. Other potential cash flow KPIs include:  

  • Accounts Payable Turnover 
  • Debt to Equity Ratio 
  • Working Capital 


Workplace Efficiency

Enhanced cash flow also results from greater workflow efficiency. As law firms make the most of their resources and spend more time on billable tasks rather than administrative ones, they also promote higher revenues and positive cash flow.  

Legal technology and outsourcing are tools that firms can use to improve workplace efficiency so that billable time is spent on billable tasks. The tech industry is filled with options to help attorneys streamline everything from task tracking to payment collections. By taking advantage of these innovations, firms can redirect valuable time towards profitable matters.  

Outsourcing has become increasingly popular within the legal industry, especially for the provision of paralegal and legal bookkeeping services. Contract paralegals offer skilled professional services without the overhead expenses of a full-time employee. With outsourced legal bookkeeping, firms can turn over their bookkeeping tasks to experts who focus their skills on these important tasks. Each of these outsourcing options  


TimeSolv Helps Law Firms Enhance Cash Flow to Increase Revenue

TimeSolv legal billing software provides law firms with many of the tools needed to enhance cash flow and improve revenue. From vast reporting capabilities to electronic billing and automated payment collection, firms can greatly benefit from various TimeSolv features. To learn more about them, click here for a free trial offer.  

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