Opening a New Law Firm

Next you need to develop a cash flow plan and budget. You will use your cash flow plan and budget to help adjust your operations as you grow your practice. They will serve as your road map for getting to a successful practice and provide benchmarks to monitor your progress. It is critically important to understand your cash flow requirements, your regular monthly expenses, your potential sources of revenue and what you will live on until you begin to generate a reliable income. Do you have an existing client base that will generate immediate income for you or will you need to draw on funds from other sources? 

The goal of cash flow management is to manage the movement of fees and disbursements into, through and out of a law practice to produce sufficient profit to make the practice a viable business.

Cash flow in a law practice involves a cycle:

To maintain the business some revenues must be reinvested as capital, marketing and overhead expenditures. Some must go to income tax. Some must be applied against debt. You should only withdraw money to meet your personal needs once you have taken care of the cash needs of the business.

Effective cash flow management helps maximize profitability by reducing the time elapsed between investment and collection. To reduce that time gap, it can be helpful to:

• Use capital infrastructure as soon as possible and as often as possible. For example, if you primarily practice in one or two practice areas, you can use your capital investment over and over, rather than having to maintain expertise, trained staff, precedents and systems for multiple practice areas.
• Convert through the phases of the cash flow cycle as quickly as possible (i.e., convert opportunities into WIP, WIP into AR and collect on AR promptly).
• Pay down debt as soon as you can.

Manage WIP, disbursements and AR to avoid leakages, which are discussed more later in this module.