Top 10 Financial Errors: #1 – Cash Flow

“The road to success is always under construction” was once said by Lily Tomlin.

When you have deadlines looming and work piling up, it is easy to let the financial side of your practice slide a bit.  After all – you are busy, so that means that you are making money, right?

Neglecting the financial side of the business of law can be the first step down a long and dangerously slippery slope leading to financial ruin. Few smaller firms have the luxury of professional managers to keep your finances on the straight, true course. But help is here! If you’ve been frustrated by money management, over the next 10 weeks, we are going to post our top 10 financial errors we have seen made by smaller law firms —and how to get safely past them.

1. Don’t Develop a Cash Flow and Financial Plan.

Starting out, all lawyers  contemplate the financial side of their law practices. But in the haste to look after your client’s needs, some lawyers just don’t give the financial part of their practice the due attention it deserves—until things start to slide downhill. Don’t assume that things will simply “work out.”  The road to success isn’t merely paved by working harder if you haven’t kept your eye on the business fundamentals.

When it comes to finances, timing is everything. Rent, salaries, other bills—all have to be paid on time or you do more than risk losing credit and incurring interest charges. You risk losing your business. When you have a situation of overdue payables and clients who refuse to pay their accounts,  you start feeling the pinch and in consequence –  you may delay making payments on your accounts – leading down the road to a financial squeeze.

So what to do?  First, sit down and do the math. For an annual (12-month) period, prepare a month-by-month detailed budget. Build in all expenses that you know will occur, or that you can anticipate, and when they must be paid. Calculate in unexpected expenses, because it is a Murphy’s Law that costs will always be greater than you anticipate, particularly as the volume of work increases. Build in marketing time and expenses. Build in the fact that there will be a ‘delay’ between getting the work in the door, rendering the invoice and then eventually getting paid! Most of all, build in your draw, because if you don’t look after yourself, no one else will.

Compare the total expenses to your anticipated revenue in the time period when you expect to realize that income. If you don’t have a historical basis to forecast income, make an educated estimate based on your marketing plan. Yes, it takes planning. Financial security is rarely an accident.

Failing to develop a cash flow projection (your budget) as against anticipated expenses is one of the surest ways to get into financial trouble and as such, it tops our list as our #1 financial error.