Cash Flow Reports – Part 2

This is the second in a series of ten tips dealing with cash flow reports and cash flow management.

Gregory Nunn once said: “Never underestimate the value of cold cash.”

While our first cash flow management tip looked at comparing your actual billings as measured against your projected monthly billings, this week we are taking things one step further in terms of looking at how well you are doing in terms of collecting your billings as measured against your projected cash needs.

Accordingly, our second cash flow report that you should be generating from your accounting system is:

#2 – Projected billings versus cash flow needs:

Here you are comparing your collected billings to your budgeted cash flow needs for the month. This tells you if you will be in a projected positive or negative cash balance for the month.  In a perfect world you would be bringing in at least enough cash to meet your projected expenditures for the month, but we all know that we don’t live in a perfect world.

While you can survive a short-term shortage in cash (often by borrowing or holding off on certain expenses), over the long haul you have to bring in sufficient cash to meet all your expenses and then some to stay afloat.

What is often surprising to lawyers is that you can actually ‘grow’ yourself into a cash shortage.  How does that work you ask? Studies have indicated that you will have approximately a 105 day ‘lag’ between the date you incur an expense and the day you recoup that expense from your client.  If you are busy opening new files for clients and incurring expenses on their behalf, you may find that the funds you are investing in these new files are not available to meet your overhead expenses.  You are actually growing yourself into a cash shortage!

It is vitally important to keep a handle on your potential cash deficit by always looking at your collections as compared to your budgeted or projected cash needs.  In this way you can start to take action – early – to avoid a ‘cash crunch’ rather than facing it at the end of the month – when salaries and rent are due.  When it comes time to paying the bills, never underestimate the value of cold hard cash.

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