Recent reports and anecdotal evidence indicate that numerous law firms reduced or temporarily withheld partner distributions to improve liquidity during the COVID-19 crisis. Ultimately, it’s up to firm leadership to determine where working capital comes from so that partners, clients, and the overall firm remain appeased. To endure crises and maintain distributions, firms need to assess how they manage cash flow. This blog post covers why and how, increasingly, law firms embraced alternative funding solutions to protect themselves during downturns.
Cash flow may have already impacted law firm operations
Having sufficient cash on hand allows firms to invest in improving infrastructure, and it provides a cushion should headwinds develop. Like nearly every other business, the pandemic has impacted law firms in unprecedented ways that require leaders to scrutinize their balance sheet. When confronted with liquidity issues, firms frequently find themselves throwing the baby out with the bathwater to see their way through a crisis.
The most considerable expense for any firm is payroll. While reducing salaries or furloughing staff could ease some financial burden, firms risk losing talent and adversely affecting their colleagues’ well-being. And while cutting internship programs reduces expenses, it can cost firms their next star associate, increase seasoned attorneys’ workloads, and hurt morale and productivity.
Another strategy is to ask clients to top-up retainers before full depletion. While this provides a temporary boost in liquidity, it can raise red flags to clients and place lawyers in the undesirable position of going hat in hand to request early payments. Asking partners to invest more is also a common and avoidable strategy for firms looking to increase working capital. In fact, many, if not all, of these drastic cash flow-related measures are avoidable.
How to increase capital without reinventing your business model
Every law firm has lock-up (un-billed work and unpaid invoices representing the firm’s total outstanding cash), and the figures related to it spiked during and after the height of COVID-19. Clients have increasingly prioritized cash reserves, exacerbating the issue of conflicting interests between firms needing to get paid quickly and companies decidedly holding on to cash as long as they can.
LexisNexis® CounselLink® FastTrack® sits at this intersection to serve both law firms and their clients. By advancing payment to firms without withdrawing from their clients’ capital reserves, both parties can continue operations and manage cash flow without negatively impacting each other.
Using CounselLink® FastTrack®— powered by LSQ, law firms can request next-day payment of clients’ invoices to boost liquidity and measure invoice payment duration in hours rather than weeks or months. This enables firms to continue operations, including partner distributions, before, during, and after a crisis because its cash they’ve already earned.
In addition, CounselLink® FastTrack® incorporates industry-leading accounts receivable technology (LSQ Dashboard) and professional back office services, including receivables collections, to provide a robust invoice financing solution that gets law firms paid faster.
If, like many firms, you offer discounts for timely payment, negotiate rates on late payments, utilize valuable resources on collection efforts, or simply want to get paid faster— contact LexisNexis® and LSQ to learn more about CounselLink FastTrack.