6 Simple Steps for Managing Cash Flow
Six Simple Steps for Managing Cash Flow
Your business is not alone.
Many businesses struggle to keep their cash flow positive.
More than likely, you can make a few simple changes that would
improve your cash flow dramatically!
A cash flow strategy should consist of more than just sending out invoices and hoping you’ll get paid. There are six critical areas in which to focus. Each of these component needs to be thought through, detailed in writing, and implemented consistently. Our goal is to give you the basic information you need to formulate and put into practice an effective cash flow strategy.
TABLE OF CONTENTS
6 STEPS TO MANAGING CASH FLOW PROBLEMS
2. ASK FOR PAYMENT SOONER RATHER THAN LATER
3. INVOICE MORE ACCURATELY, EARLIER AND/OR MORE OFTEN
4. MAKE IT FAST AND EASY FOR YOUR CLIENT TO PAY
6. STAGGER YOUR MAJOR EXPENSES
STEP 1 of 6
1. IDENTIFY THE REAL PROBLEM
One of the keys to successfully solving any problem is to identify the root cause(s). Cash flow issues are rarely solved by going to the bank for a short term loan; looking deeper may well negate the need for a loan. For example, are your services priced appropriately? If you aren’t charging enough money for your work, without restructuring your pricing model, you will never experience positive cash flow. Similarly, if you don’t have enough clients, the fundamental problem is marketing, not cash flow procedures.
Let’s talk about the 2 big picture issues that may be negatively impacting cash flow:
PRICING & CLIENTS
DOES YOUR PRICING REALLY REFLECT YOUR COSTS?
Questions to ask:
· How much are your monthly business expenses (including all standard overhead costs, office expenses, insurance, software and other technologies, marketing activities, other professional expenses, and general administration costs)?
· How much do you need to make (salary + benefits) per year (after taxes)?
· How much does the business need to make per year (after taxes) to cover all costs (including your salary)?
· How many hours per week can you reasonably and consistently bill? This is your weekly billed hours goal.
Your cash flow strategy has to start with your pricing. Answer the questions above to determine if your pricing really reflects your costs, including your own pay. Are your expenses what you thought they were? Is the profit margin high enough?
Take a look at the simplified pricing model below to get a basic idea of where you stand pricing wise. If you are a sole practitioner, this should be very simple, but it can be just as simple for firms. Think of each attorney as a business unto themselves – because in many ways, that is exactly what they are.
The Pricing formula is this:
Desired annual income (adjusted up by 30% for taxes) plus annual expenses DIVIDED BY annual # of billed hours (adjusted for 2 weeks vacation) = Minimum Hourly Rate
As an example, let’s say:
· Take home income you need/want is $75,000 annually (plus 30% for taxes)
· A decent guess on expenses all in for an attorney and 1 support person is approximately $6000 a month (over 12 months is $72,000)
· It is reasonable to say that an attorney can have a billed hours goal of 25 hours per week (over 50 weeks is 1250 hours per year)
[{$75,000 / .7} + {$6,000 * 12}] / [25 * 50] = Minimum Hourly Rate
OR
[ $107,143 gross salary + 72,000 yearly expenses ] / 1250 hours per year =
$143.00 per hour
If this attorney is charging anything less than $150 an hour, they will never achieve positive cash flow. This holds true for sole practitioners and individual members of a firm. When a firm allows individual attorneys to charge too low an hourly rate, those attorneys will not be contributing to the firm’s profitability.
FREE CASH FLOW CONSULTATION
On to the second big picture issue affecting cash flow success…
CLIENTS
DO YOU HAVE THE RIGHT NUMBER (AND KIND) OF CLIENTS?
Questions to ask:
· What services are provided in a typical case?
· How many hours do you spend on a typical case?
· How many of those cases would you need to meet your billed hours goal?
Cash flow issue could be the result of an inadequate number of clients and/or an inadequate number of the right clients who need higher-dollar services. That indicates two problems with your marketing: You aren’t reaching enough people with your current marketing efforts, and you aren’t marketing directly to people who need the services you want to provide.
Those are marketing problems and before you address them you should have an idea of how many clients you would need over the year to make your minimum desired salary.
The Client formula for a Divorce Attorney may look something like this:
· Typical Case: Contested Divorce
· Hours spent on typical case = Approx. 50
o Approx. 50 hours @ $150 = $7500 - $8000
· Cases Needed to meet billed hours goal of 25 per week:
o 25 Contested Divorce Cases @ $150/hr for approx. 50 hours each =
$187,500 – 200,000 PER YEAR
Because 25 hours is the previously determined Billed Hours Goal, 50 hours equals 2 weeks of work. So our attorney would need 25 divorce clients each year to make what she wants to make.
Do the calculations on your practice. Do you have enough clients? If not, you have a marketing problem, not a cash flow problem.
FREE MARKETING CONSULTATION
BACK TO THE TABLE OF CONTENTS
STEP 2 of 6
2. ASK FOR PAYMENT SOONER RATHER THAN LATER
Questions to ask:
· Can you require payment at the time of service?
· Can you collect a retainer for your services?
· Can you group services together in a ‘package’ that provides some benefit to the consumer for pre-payment?
Are you asking for payment before, at time of or after you provide the legal services? Cash flow is very significantly impacted by the length of time that elapses between when you perform the service and when you receive payment for it. The shorter that interval, the better. So, in your business, how can you keep that time as short as possible?
The very obvious answer to this is to get a retainer upfront. That way you can be paid immediately upon completing the case or even at certain milestones in the case.
You could also have the client come into the office at the close of case – maybe to sign a will, for example. During that office visit, the client should be presented with the invoice as part of the documents he/she will be reviewing and payment should be requested at that time.
In all cases of payment, if you are not comfortable asking for the money, do what the doctors do – send them to the front desk to make the payment. Just make sure that a receipt is given.
Julie Jones of the NKY Bar Association occasionally receives complaints related to the financial side of the agreement between an Attorney and their client. Clients have mentioned being confused about how their money was spent, why their retainer was depleted so quickly, and why they were not provided with a detailed receipt. Julie's suggestion for every Attorney is to consistently keep their clients informed about the complexity of the work being done on their behalf.
STEP 3 of 6
3. INVOICE MORE ACCURATELY, EARLIER AND/OR MORE OFTEN
Questions to ask:
· If you provide professional services on a ‘project/case’ basis, can you set up certain milestones at which the client expects an invoice?
· If this is an ongoing service, can you invoice weekly or bi-weekly rather than monthly?
· Can you set a standard for when your invoices are sent?
FIRST, LET’S TAKE A LOOK AT YOUR TIMEKEEPING PROCESS:
Time is ideally collected daily, but at a minimum it should be collected once a week. Any longer than that and I guarantee that you are under billing your clients. If an attorney doesn’t quite remember how much time was spent, odds are he/she will under- rather than over-report the time. The closer the timesheet is completed to when the work is done improves the accuracy of the billing time to perfection.
Tom Rouse of Thomas Rouse Law strongly recommends tracking your time HOURLY. But if you are dedicated to precise timekeeping that leads to highly accurate invoicing, consider using an appointment book that allows you to track your time in 15 minute increments.
NOW LET’S THINK ABOUT INVOICING EARLIER AND MORE OFTEN:
Invoicing should be done at least once each week. The timesheet should contain a check box (or other notation) that indicates a matter has been completed and the client should be invoiced this week. There is no reason to invoice only once each month.
Set a standard for when your invoices should be sent. For example, all invoices are to be sent within 5 business days of the completion of the work. No need to wait until the beginning of the month to send all invoices.
If you provide services on a ‘matter/case’ basis, set up certain milestones at which the client knows to expect an invoice. There is really no need to wait until the matter has been completely resolved.
If you are providing an ongoing service, invoice weekly or bi-weekly rather than monthly. Clients may well welcome the opportunity to pay in smaller chunks.
Greta Walker of Hoffman, Walker & Smith suggests thinking about a retainer as "first and last month's rent" by dividing it between initial services and final services. As the first portion begins to run out, the client can be made aware that while there is money remaining to cover standard final costs, additional payment is required for any and all additional hours needed to resolve the case.
Michelle Reid of Strauss Troy suggests utilizing draft bills to keep clients informed about the impending depletion of their retainer. Draft bills should provide details about the possible ways in which the remainder of a retainer can be used.
Each of these suggestions would allow clients to answer the questions:
· How do you want the remainder of your retainer spent?
· Do you understand that more money is needed for additional services?
These suggestions also allow clients the time and opportunity to make financial arrangements while safeguarding you from working hours that may not be paid.
STEP 4 of 6
4. MAKE IT FAST AND EASY FOR YOUR CLIENTS TO PAY
Questions to ask:
· Are you sending your invoices via email?
· When providing services to a business or organization, are you sending the invoice to the person ultimately responsible for approving payment?
· Can you set up electronic funds transfer (EFT)?
· Are you accepting credit cards in your office and online?
The days of mailing a physical invoice to your clients are nowhere near over, but paperless billing and/or email reminders can be a more efficient means of keeping your clients aware of their financial responsibilities while you’re handling their case. It’s as simple as collecting an email address when you gather other client info.
If you are an attorney who is providing Business & Corporate or Government & Municipal services, your invoices will likely be paid by someone in the organization’s Accounts Payable Department. This may not be the person or people with whom you have regular contact regarding legal services. It is reasonable to request that your clients provide contact information for their A/P Department to avoid having your invoice waste time on the desk of someone who is not responsible for paying.
There may be a situation in which a client pays a regular amount each week or month, whether during the time when you are handling their case or as part of a payment plan after the case has been resolved. Setting up a system of electronic funds transfer (EFT) can make things easier on both you and the client by relieving their need to remember to make the payment weekly or monthly and relieving your concern regarding whether or not you will receive payment.
The question of whether or not to accept credit cards can be a complicated one if you think about the fees you will pay (up to 3.5% of each transaction) without thinking about the added value it provides to your clients. Tom Rouse has done an excellent job of putting this into perspective…
When deciding whether or not to accept credit cards and deal with the per-purchase fees, Tom Rouse of Thomas Rouse Law reminds us that it costs upwards of $250 an hour to think about it. Is that worth your time, or does it make more sense to just go for it? The fees can be considered an expense that gets added to the formula used for determining your hourly rate. Charging just a bit more per hour can help cover the costs of providing your clients with a convenient and streamlined payment process.
If you are interested in allowing your clients to pay by credit card, Michael O’Hara, Attorney at Law, has suggested looking into Omega Processing Solutions as an option for electronic transaction processing.
For more information about credit card processing options, take a look at the following:
STEP 5 of 6
5. COLLECT ON YOUR INVOICES
Questions to ask:
· Do you have a method for monitoring and reporting on your receivables?
· Are you acting quickly when someone hasn’t paid?
· Do you have a simple set of collection letters (emails) in place?
· After 180 days, are you prepared to use a collection service?
This also seems like a no-brainer, but it has been shocking to me how much of any attorney’s invoices are never actually collected. YIKES! You have performed the work or provided the product, you deserve to be paid. If you haven’t received payment within 15-30 days, you must have a pre-programmed next steps in place.
Act quickly when someone hasn’t paid. The sooner you reach out with a reminder, the more likely you are to collect easily. Make this easier on yourself and your staff by having a simple set of collection letters (preferably emails) in place. You should have one for each of 30-60-90 days in arrears. At 6 months, or 180 days, consider using a collection service.
So what % of billed revenue are you actually collecting? When you pay attention to your accounts receivables on a regular basis, you will collect more money. Again, you just will.
STEP 6 of 6
6. STAGGER YOUR MAJOR EXPENSES
Questions to ask:
· Are you able to stagger payroll with other major expenses?
· Is it possible to set up quarterly, bi-annual and annual expenses to correspond with higher revenue months?
Staggering payroll with your other major expenses can help to get a better hold over cash flow. For example, consider paying payroll on the 15th and 30th (2nd and 4th weeks) and all other expenses around the 1st and 21st (1st and 3rd weeks). This will prevent a major drain on your account before the balance can be replenished with client payments.
It is also worth considering the possibility of aligning major quarterly, bi-annual and annual expenses with higher revenue months. You know when these occur, so coordinate them to your cash flow advantage.
Darren Wurz of Wurz Financial suggests handling recurring business expenses the way many individuals prepare for estimated tax payments: Create a separate bank account from which you pay all standard, recurring overhead costs and pay yourself a regular income. The account should be replenished by automatic monthly or weekly transfers from a primary account or when you receive a settlement or large payment. This will provide a clear division between expected and unexpected expenses and will prevent a situation in which unexpected expenses deplete funds needed for standard operating costs. This will also help you manage your finances more efficiently by giving you a sense of regular, steady income and preventing poor financial decisions.
CASH FLOW BEST PRACTICES
· Revisit pricing twice a year
· Implement a strong marketing plan to bring in the right clients
· Ask for & collect payment as close to the time the service is performed as possible
· Secure a retainer when appropriate
· Track your time hourly
· Compile time weekly, include information about what is ready to be invoiced
· Invoice once a week
· Make it fast & easy for clients to pay by utilizing appropriate electronic tools
· Manage A/R weekly with a simple collections plan
· Create an expense payment plan that fits with the ebb and flow of your income
There they are – they don’t seem so fancy or earth shattering BUT they work. And providing that your pricing is right and you are attracting enough clients, you should never have a cash flow problem.