Law firm money woes: Flattening the cash flow curve

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We all know that the pandemic has affected every industry in the world, including the legal industry. Already, we’ve seen that law firms are reducing compensation, holding partner draws, rescinding associate offers, diluting some benefits such as 401K matches, laying off “non-essential” staff, and cutting summer associate programs.

This is all understandable. Whenever there is an economic downturn, organizations feel the need to tighten their belts, and often the fastest ways to do so are by some of the actions described above. Further, the outside pressure law firms are experiencing will continue to hit their wallets; and this pressure manifests itself in a number of ways. For example, there’s the likelihood that some clients will slow down and may not have ample cash to pay full legal fees; or courts are closed so litigation might temporarily be slow.

And as humans we know that panic breeds more panic. When one law firm reduces costs by cutting staff, others typically follow suit.

But are there other remedies? And just as importantly, how will law firms that are making cuts now handle their work when it comes back in several months?

The panic of cash flow isn’t affecting every law firm. In fact, some firms have never been busier. Estate planning, bankruptcy, and employment law are booming. After a bear market, litigation inevitably rises, as does matrimonial law. And a number of large law firms have committed to not needing layoffs or salary reductions.

So how can firms prepare for more stable law firm economics? How should they get ready for the next wave of work, especially if staff is reduced? What can the legal industry learn from all of this so that the profession can stay vibrant and financially healthy going forward?

Taking time to analyze

Firm leaders need to take this time — not next year or next fall, but now — to analyze what’s happened with their cash flow and financial planning. They also should be taking stock now of their systems because remote working and even litigation will not be going away regardless of COVID-19.

Definitely, flawless tech systems for remote work need to be in place to ensure the operation of critical internal activities like billing, collections, time-keeping, and payroll; also, vital legal processes need to continue, such as e-discovery, document sharing and retrieval. Further, important operations like providing data security, cybersecurity, and even secure video meetings is even more essential now.

“For preventing layoffs and ensuring revenue can be generated, it’s essential that every staff member has the ability to work from home, especially having the ability to transmit data securely to clients and firm colleagues,” says Ray Prather of Prather Ebner, a Chicago estate planning and litigation boutique. “It seems obvious, but a data breach during this time would only make matters worse.”

Asking the right questions

Just assessing current resources is not enough. It is crucially important to assure your law firm’s economic and resource stability by assessing with solid data (not just intuition) issues such questions as:

  • Should we retain more cash on hand at the end of the year? Typically, law firms pay partner earnings at year’s end and save very little for future investments. This is often for tax reasons, but it also means there are no “rainy day funds.” The firm owners — partners or shareholders — can either leave more money in the pot, or understand that they may need to put money back into the firm in times of trouble.
  • Can we flatten out the legal fees curve? Again, typically, firms push to collect client fees at year’s end. Perhaps it would be better financial planning to modify this routine. There are many ways to do this, depending on your firm’s billing, collection, and fee arrangement practices, and your data could show you a better way.
  • What are the profit margins of your clients?
  • What is the profit percentage and amount of each associate? Each partner?
  • When was the last time you seriously analyzed all of your costs and compared them to the market? This question applies to supplies, technology, e-discovery, payroll systems — you name it. Law firms are renowned for not revisiting costs of all vendors.

And by all means don’t forget other big cost savings: Figure out if there’s a way to perform legal work more efficiently and less expensively. There are proven methods for providing legal counsel, documents, and research that may bring way more profit to your bottom line. Indeed, based on prior economic downturns, “firms would be well served by the application of more process improvement to ensure efficiency and proven value to their clients,” says Frederick J. Esposito, Jr., COO of Rivkin Radler and a senior member of the faculty for the Legal Lean Sigma® Institute.

Not every law firm will need a sweeping overhaul to get their finances stabilized and primed to spring forward. With the help of an advisor or coach, a firm can focus on one particular aspect of their operations and save a bundle without compromising the integrity of their counsel.

Then, and only then, will a firm be able to withstand this and future storms.