Cash Management and Cash Flow
By Michael J. Ford

Many law firms periodically experience cash flow issues. Unfortunately, attorneys rarely recognize the relationship between cash management and cash flow and, as a result, are destined to repeat their history of cash flow problems without understanding why.

Most attorneys whose firms charge for their time vaguely realize that "time in the books" is connected to cash flow, somehow. However, firms with chronic cash flow problems never recognize the difference between work in process (time in the books) and cash flow. They also rarely realize that cash management and cash flow are inextricably linked and that to avoid the one you must engage in the other.

CASH MANAGEMENT OVERVIEW

Cash management means all phases of turning work into cash. The production of work in process (WIP) is the first phase of the cash management process. The billing of unbilled time is the second phase of cash management. And the collection of time that has already been billed, i.e., accounts receivable, is the third and final phase of cash management.

• Phase One -- putting time into the books. The first phase of cash management, the production of WIP, is the only phase that most attorneys focus on. Many law firm managers operate on the assumption that if enough WIP is produced, the firm can overwhelm shortcomings in the other cash-management phases. If your firm operates in the happy environment of producing so much billable time that you can overcome inefficiencies further down the cash-management pipeline, then you should stop reading this article.

  However, if your firm has had to become competitive in its pricing, has seen salaries rise regardless of the ability to pay those higher salaries, and needs every dollar that can be produced by the firm, than you need to keep reading.

• Phase Two -- billing time that is on the books. The second phase of cash management, the billing of unbilled time, would seem to be an automatic function best handled by the back office staff. Attorney involvement is typically limited to a review to correct errors on the bills going out. Law firm management rarely focuses on this function due to its seemingly routine nature.

  And yet, it is here that some of the most glaring inefficiencies can develop and, if left unchecked, lead inexorably to cash flow problems.

  Attorneys are typically the cause of these problems as they hold bills and keep them from being sent to the client. The reasons for holding bills are many, but one of the most pernicious is that the attorney holding the bill is embarrassed about something.

  The attorney may be embarrassed by the size of the bill because of a failure to clearly communicate to the client changes in circumstances that have led to a higher than predicted bill. The attorney may have not delivered something that the client is expecting. If the attorney sends the bill, that will remind the client of what the attorney has promised and not delivered -- and the client might call to complain.

  The unexplained holding of a bill that is ready to be billed according to the legal fee agreement is a red flag to law firm management that something is wrong with this engagement. Ferreting out such problem bills should be a risk management as well as a cash management imperative for firm management.

• Phase Three -- collecting for the time that you have billed. Collecting overdue accounts receivable is another area where attorneys are prone to turn the matter over to staff.

  Attorneys are reluctant to talk about fees. They cringe at entering into retainer agreements. They abhor asking for deposit retainers. And they get positively ill at the prospect of calling up a deadbeat client and demanding that a bill be paid.

  As a result, the collection process is usually turned over to back office staff. Extreme cases are sent to outside collection agencies. Rarely will an attorney aggressively and methodically stay on top of his overdue accounts receivable.

  Ironically, it is the handling attorney who has the best chance of collecting an account receivable. Clients, who have been well-treated, are more likely to respond positively to their attorney's call. This is doubly true when the engagement is not yet completed and the client is concerned that unpaid bills not distract his attorney.

  Well-run law firms keep all three phases of the cash management process on their radar screens all of the time: WIP, the billing of unbilled time, and the collection of billed time.

  When a law firm develops known and temporarily inescapable problems with one phase of the cash management process, all the more emphasis must be devoted to the other two legs of the cash management tripod.

  For example, if your firm has lost one or more key timekeepers who will be difficult to replace, you need to focus on getting the time that is being logged billed and the time that is billed promptly collected.

  However, too often law firm management will focus solely on the logging of work in process as a substitute for properly managing all three phases of the cash flow management process.

CASH MANAGEMENT ROADMAP

As a first step to effective cash management, the law firm management needs to review unbilled time, identify those files that can be billed, and then see to it that they are billed. This may require breaking down resistance by billing attorneys to the billing of those files. The managing partner, chief executive officer, or a board member may need to step in to accomplish this; billing attorneys have a remarkable ability to obfuscate when confronted over unbilled time. If you doubt that statement, ask your law firm administrator how many billing attorneys readily agree to bill time that they have marked as a "hold" when asked to do so by law firm administration.

Second, to the extent your firm handles contingent fee matters you need to turn a spotlight on unbilled contingent fee matters and (a) verify that all that can be done is being done on those matters to "move them along"; (b) require an estimate from the handling attorneys of the estimated date of closure and the estimated fee; (c) and continue to follow up on (a) and (b) each month. Here again, involving the managing partner, chief executive officer, or a board member can be helpful because of the ability of the attorneys handling those matters to delay their reporting and provide less than complete information. If you doubt that statement ask your law firm administrator how much information she has been given by the attorneys handling contingent fee matters relating to the timing and extent of fees that will be collected on those matters.

Third, institute a program to reduce the intake of files that will never be billed because they never should have been taken on. This will typically take the managing partner, chief executive officer, or practice group chair because of the likely inability of the billing attorneys to arrest this problem. If you doubt that statement ask your law firm administrator when, if ever, she has been consulted about a new engagement prior to taking it on and how many engagements are being entered into with inadequate billing agreements and retainers.

Fourth, review the accounts receivable list and do everything that can be done to collect those bills. This will typically take the managing partner, chief executive officer, or practice group chair due to the reluctance of billing attorneys to confront their clients and demand payment. If you doubt that statement, simply look at your overdue a\r reports and then ask yourself how your firm could ever let that much in uncollectible time build up.

Fifth, act promptly to replace or acquire attorneys and paralegals when vacancies occur or needs increase. This will take the entire management team because of the inability of individual shareholders and partners to look beyond their own particular needs and take into account the needs of the entire firm. If you doubt that statement . . .; but then, you can't doubt that statement if you are a shareholder and board member because of your own experience with such issues.

Finally, continue to harp on the production of billable time. Of course, most of you are already doing that because, typically, that is all we do with respect to cash flow concerns.

In short, simultaneously keep all three aspects of cash management (the production of WIP, the billing of unbilled time, and the collection of billed time) on your radar screen each and every day.

But, hey, that's simply my opinion. I could be wrong.

MICHAEL J. FORD is a partner with the St. Cloud law firm, Quinlivan & Hughes, P.A. He concentrates his practice in the area of civil and appellate litigation.