Thursday, June 05, 2008

The Cash Flow Vacuum

In the last four weeks there has been an explosion of articles written on practice management issues in today’s law practice. Over this time, they have become increasingly bolder and more hostile. Although I believe it is time to make a change regarding the management of today’s legal practice, initiating change is better accepted when it is a product of educating rather than bayoneting the wounded.

All business entities whether commercial or professional services are interested in managing their cash flow. The management of cash flow, a scare resource, is the entire basis of economic modeling. Organizations, as a whole face both an inward and outward cash flow. No one would argue it is the sum of these cash flows that is of greatest interest to an organization. How organizations manage the incoming and outgoing cash flows determines their long term economic viability. Although the management of these processes is entombed with management culture and market dynamics, they can be refined.

The management of outgoing cash flow is easily for most law firms. For the most part, the organization’s vendors communicate how and when they want to get paid. For the law firm, this dynamic goes unquestioned. In all my years of working with and within law firms, 99% of the time vendor bills get paid on time. Whether it is the preservation of a sterling credit rating or the demonstration of financial worthiness, payments are made based on terms.

In today’s legal practice, however, incoming cash is not as well managed. Anyone working in today’s law firm on the collections side would easily attest that cash receipts are dictated by the client’s attitude; where the firm’s bill fits into the client’s priority structure. The important thing for today’s professional services organization is to make sure their bills are at the top of the client’s payment priority structure!

Today’s professional firms are simply operating in a vacuum in how they manage their profitability. In today’s article Should Small and Midsize Firms Create Strategic Plans? (, consultant John Remsen Jr. concludes “Firms often steer clear of crafting the plans because the process is "hard" work and often raises unpleasant issues”. To that I would add, for the most part attorney’s simply lack the acumen to look at the environment and the firm as an economic ecosystem.

Although most firms really don’t undertake planning, other than isolated rudimentary budgeting, there are those who do plan but very few undertake building a strategic vision. On the collections side, most firms that ‘plan’ how much money they will collect each year. However, what I have found to be the most amazing part of the ‘cash receipts plan’ is that it is made in isolation. It is built in complete isolation of the economy, the inherent risk of their client portfolio, the current inventories, and the culture of the firm. These firms rest their entire existence on, essentially a wish rather than a probable reality. This lack of planning is supported by Remsen with “… attorneys often are more focused on short-term issues rather than the longer-term outlook. They also tend to be autonomous in their thinking, and they don't like risks or change”.

Today’s firm have a multitude of interrelated issues, none of which can be resolved overnight. This is also true for commercial entites;as they too have issues. However, commercial entities tend to have more planning and strategic vision as part of their operations diet. One of the first places firms should start, I feel, is achieving a better management of incoming cash flows. Firm’s have to realize that delinquent client payment isn’t a product of a poor collections policy or staffing. It is almost entirely based on the management of risk and client intake. The management of risk must be covered in the firm’s credit policy. In my two decades of working within and around law firms, I have yet to encounter a firm that has true credit policy. Credit and collections policies are meant to work hand-in-hand to firmly ground the organizations relationship with the client; to establish shared expectations.

It is only from tightly coupling between the credit policy and collections policy that firms can establish the foundation on which to accomplish more than budgeting. Firms can begin to strategize about their future, enhance their competitive advantage to become the leader of their peer group.

Whether you (firms) like it, believe it or not – change is happening in the legal market space. Sadly a few firms are initiating change while the market is forcing change on most. Clients are becoming more disenchanted with the practices of today’s firm and the results are being manifested in depressed cash inflows. Jason Mendelson, a VC and lawyer, had this to say to in the article VC Slams Attorneys on Salaries, Overlawyering, ( “I've been working on a thesis for quite some time that the entire business model of law firms is going to have to change, or it's going to get uglier."

The issue of having a solid credit and collections policy is, I feel, jugular to the overall financial management of the organization. In order to help firms to act, now, rather than react, later, the next several postings will focus on establishing credit and collections policies in today’s economy.

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