Where are the money pits in your practice? One of the biggest is called: “Unbilled Disbursements” These disbursements represent expenditures on behalf of clients that you expect will be recovered in due course. Of course, therein lie the assumptions: that you will be able to bill for them and you will be able to recover them in time. But there is a quote of Ayn Rand that is appropriate here:
Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.
Yes you need to expend funds on files you are handling. But don’t forget that you are the driver in terms of managing these funds. Drive these disbursements recklessly and you can end up a wreck and in financial ruin. Accordingly, our next cash flow report that you should be generating and reviewing is:
#5 – Unbilled Disbursements
These disbursements represent credit that you have extended to your clients and therefore, capital that is unavailable for you to operate your practice. You have taken operating capital – funds required to pay rent, cellular phone service and wages – and invested them into client files. Problem is – there is no fixed time within which to recover these expenses. And no return other than a straight recovery. So you are losing money each day they are outstanding.
Therefore: whenever possible, bill these immediately in order to recapture this operating cash for your firm. Even better: ask for trust retainers up front that can be used to pay these disbursements quickly and easily when you render a bill for these disbursements. This way you are not the person who ends up financing your client’s files!
Disbursements can be one of the biggest components of total firm debt, particularly in litigation practices. As we all know, accumulated debt can sink even the largest ship. Keep in mind that total debt as a percentage of net fixed assets = 50-80% (hopefully you place on the lower end of this scale).
By keeping down the client disbursements, you reduce the overall debt that your firm is carrying – thereby giving you greater resiliency in troubled economic times.