Tips for Creating a Cash flow Budget for Your Law Firm
How much money do you need to run your practice? Where will it come from? A cash flow budget is a useful tool to help avoid short-term shortages of money. It is an estimate of all cash receipts and all cash expenditures that are expected to occur during a certain time period. For contingency fee law firms, a cash flow budget can be difficult to develop because money comes in very irregularly. Settlement checks can be delayed months while bills pile up. However, firms need to understand how much income they need to produce to meet their cash needs and project when they may need additional financing. Here are a few tips to get started on creating your budget:
Estimate cash inflow/income. Evaluate your caseload and project which cases will settle, when and for how much. Obviously, this will be easier to do with some matters than others, but you should estimate income to the extent possible.
Ascertain cash outflow/expenses. Look at last year’s monthly expenses and determine which ones are recurring and if there will be any changes this year (ex. increase in rent, payroll, etc.). Also factor in any new expenses you expect to make (ex. new purchases, hiring, etc.). If you are considering making capital expenditures or taking out additional loans, a cash flow budget is crucial to understanding what moneys you will need and showing the bank that you can repay any funds. Do not include noncash expenses. Items such as monthly depreciation and amortization do not involve cash outlay but are included in your company’s financial statements.
Determine your projected net cash flow, then review it monthly. Subtract total cash outflows from total cash inflows to determine the net cash flow for each period. Review your budget at the beginning of the month looking at outstanding accounts receivable and accounts payable. Identify what receivables you expect to collect and what invoices you expect to pay in the month. You should also look at the prior month to compare your forecast to actual figures. Update your budget going forward for any significant changes in projected revenue or expenses.
Plan for at least 6 months. Because it’s difficult to predict when revenue will come in, trying to project too far into the future won’t be worthwhile. At the same time, if you don’t look far enough into the future, you won’t be able to predict potential problems in time to fix them.
Make adjustments. If your net cash flow is negative, you will need to take action. If the long-term outlook is negative, you may have a more serious problem with your income or expenses. However, if it is a short-term issue, then some tactics that can help include:
- Shifting the timing of some expenditures.
- Increasing short-term borrowing in periods with negative cash flow, and projecting repayment in periods with positive cash flow. Also consider using post-settlement funding to gain access to cash.
- Delay the due date of fixed debt payments to match periods with positive net cash flows.
- If you will be borrowing money or delaying payments, remember to add any additional interest charges to your expenses.
Although a cash flow budget is an excellent tool for managing your expenses, sometimes you will still have months where funds aren’t enough. That’s where post-settlement funding can make a big difference. RapidFunds® can purchase a portion of your legal fee on a settled case giving you the cash you need to pay your bills – often the same day.