Following on our earlier Top 10 Financial Errors posts, this is the first in a series of 10 posts dealing with Cash Flow Reports and in particular, cash flow management.
Mark Ruffalo once said: Certainly, it’s very easy to fall in love with cash. If you’re going to make all your decisions based on cash, you’re going to have a pretty naffy career.
In my MBA days, I took a series of accounting courses. One of the courses was entitled ‘managerial accounting’ but it really was about how to manage cash. I still recall the professor walking in and saying: “Forget everything you learned in those other accounting courses. Here you learn to manage cash – and that is what you will need to know to keep your businesses alive.”
So how do you learn to manage the cash in your practice? How do you assess how you are really doing? How do you get a solid grip on your financial future?
One key is cash flow management – you must understand over time what funds are coming into your practice, and where the money is flowing out. In this series of posts, we are going to look at the top 10 monthly cash flow managerial reports you should be getting from your accounting system, what they mean, and why you should be producing (and reading!) them at least monthly.
The first cash flow report that you should be generating from your accounting system is:
#1 – Overall and projected monthly billings:
What are your overall monthly billings, measured against your projected (i.e. budgeted) billing target? This report will tell you if your gross income is meeting projections. Needless to say, if you are not billing according to budget, you are not going to be receiving cash according to budget.
A related question is what percentage of collected monthly billings should a lawyer’s income be? According to James D. Cotterman, a consultant with Altman Weil, the figure should be 55-60%. (Cotterman, James D., Fiscal Management of a Law Firm, Altman Weil, Report to Legal Management, September 2001.)
Why do we mention these two ideas together? If your gross income is falling below projections, then there will be a direct and negative impact on cash which you can withdraw as personal income, since you will still be required to pay the bills in order to stay in practice.
We have long advocated that you take the mental approach of ‘paying yourself first’ rather than paying yourself last. Why? Because if you envision paying your projected draw first and then meeting all other expenses, you will work towards that goal. If, however, you take the position that you will pay yourself whatever is left after the bills are paid, then you will only get what is left… whatever that amount might be.
In our view, it is much better to know your financial budgeted goal, work towards it and measure your progress – particularly when that goal is having sufficient cash to meet all your needs, including your draw!