Part 2 – Cashflow Levers
The lifeblood of any businesses’ financial success is cashflow. Yet, understanding cashflow can be elusive. It’s not your profit, it’s not just cash at bank and it certainly isn’t what’s in your overdraft account. Cashflow is also more than cost management.
The starting point to understanding and improving your firm’s cashflow is to recognise cashflow levers, the impact they have, and then how to optimise them. Everybody in your firm has an important role here.
Positioning costs with new clients
It starts by articulating your value to new clients and positioning costs. This is a conversation that everyone in the firm should be able to conduct positively.
This is especially important for long-term matters and/or new clients. Requesting monies be deposited into the firm’s trust account should be standard practice. Setting up a retainer is challenging, but is a good gauge of your client’s commitment and respect for your work.
Tracking costs against matters
Whether your firm offers services on a fixed fee or time basis, allocating time and disbursements to matters will provide clarity on matter profitability, progress against retainers, and frequency of invoicing.
Systems that reduce the reliance of manual processes such as the capture of time and costs against matters, as well as generate alerts for additional monies, will improve cashflow. They also provide transparency on the profitability of matters and clients.
Most businesses operate under an accruals method of accounting, rather than cash. So while you increase revenue every time you generate an invoice, you may adversely impact cashflow.
Why? Because revenue only becomes cash when your client pays you.
Even worse, each new invoice triggers income and GST liabilities – regardless of whether you ever get paid. This is even more problematic if the invoice is left sitting in reception waiting to get mailed.
This doesn’t mean you should defer issuing invoices for work completed. In fact, the opposite – every delay costs you money, which ultimately restricts partner drawings.
Workflow disciplines, diarised tasks and clear accountabilities will add rigour to issuing invoices and so improve cashflow.
After invoicing, robust collection processes mean unpaid invoices aren’t left to drift along.
Clear responsibilities for collections are paramount. From there, your systems should automate who needs to do what, and when they need to do it.
Having information on debtors and billings on your personal dashboard creates transparency of cashflow ‘blockers’ and demands immediacy of action.
Reducing lock-up days
You may hear the term ‘lock up’ days from your banker or accountant. This term represents the cashflow ‘locked up’ in your work in progress (ie unbilled work) and debtor balances (ie uncollected invoices).
Macquarie Bank’s 2015 Legal Benchmarking Report found four in five firms now collect more than 75% of billings through tightening credit controls and leveraging technology to improve collections.
They highlighted that if your firm turns over $3m p.a., a 30-day increase in debtor days could mean finding an extra $250,000 a year in working capital.
Their best practice tips for keeping collections under control are:
- Use technology to automate billing cycles and collections.
- Offer incentives for early payment and charge interest on overdue invoices.
- Make it easy for clients to pay.
To better co-ordinate and manage cashflow levers, ensure
- Clarity of responsibility and accountability across your team with dashboard visibility – providing transparency of cashflow drivers and actions needed
- Systematise workflow and reminders to minimise missed deadlines
- Ease of generating invoices and debtor management
- Range of payment options – automate reconciliation
- Compliant management of monies in trust