In one of our previous blog posts, we discussed how to improve your law firm’s profitability. To ensure a boost in profits, you must first be wary of your firm’s financial stability and take heed of any law firm red flags that show up and deal with them appropriately and in time. In this blog post, we will discuss some of the financial red flags that your law firm should avoid.
Red Flag #1 – Reporting a negative cash flow
Your law firm is a business. And the number one rule for a business to survive – cash must flow in more than it goes out! Your expenses must never grow faster than your revenue.
Problem indicators you should look out for:
- A decrease in revenue per partner or per attorney.
- A decline in net earnings.
Red Flag #2 – Collecting due invoices
Statistically, if you are billing less than 95% of the hours your attorneys are putting in and collecting less than 97% of those hours, your accounts receivable are piling up with invoices that are overdue. That is a clear red flag. You are slowing down your law firm’s earnings, and you are not getting paid on time.
Plot a graph – your billable hours against your collected money. If the graph shows a downward slope, you just found out your problem indicator. You have a collections issue, which will affect your law firm’s cash flow.
Make sure you send regular invoices to your client and your accounts receivable are cleared as soon as possible.
Red Flag #3 – Owing more than owning more
Since a law firm is a business, you have to make necessary debts to keep your law firm running. It is important to keep note of how much debt you make, though. Your problem indicator is when your debt outgrows the asset that you own, and you have not been able to pay a debt off within a 3-months period.
Do not let your debt get out of control – this will result in a loss of morale and a huge risk of losing your business altogether.
Avoid the red flags when you are ahead
Address the positions where your law firm is having difficulties and plan accordingly.
The third red flag is all on how well you deal with your debtors. One absolute solution for the first two red flags though, when they have been spotted or before they even show up, is investing in an expert legal bookkeeper for your law firm.
With the help of automation legal practice management softwares like Leap and QuickBooks Online, your hired legal bookkeeper can provide you with the proper support that your law firm requires. Keeping track of those billable hours will get easier, and an investment in legal bookkeeping services will look more than profitable once your law firm dodges that financial disaster bullet.
