Law Firm Cash Flow: How to Forecast and Manage It

Law firms turn time into fees, fees into bills and bills into cash, and every step takes time. Unbilled work in progress and unpaid bills can easily add up to several months of fees. Firms with strong cash flow manage that cycle deliberately: time recorded daily, bills sent promptly, collections chased consistently, and drawings set from cash rather than hope. This playbook sets out the routine. For how law firm cash flow works and a worked collections example, see the law firm cash flow forecast page.

Lockup: the key measure

Lockup days = work in progress (WIP) days + debtor days

A firm with $1.4 million of annual fees and 105 days of lockup has about $400,000 tied up in unbilled and unpaid work. Cutting lockup by 20 days releases about $77,000 of cash. Track lockup monthly by fee earner and practice area, and set a target that improves a little each quarter.

The weekly routine

1. Cash received against forecast.
2. Bills to issue: matters at billing milestones or month-end.
3. Overdue bills by client and fee earner, with next actions.
4. Disbursements incurred and not yet billed.
5. Payroll and major payments due.
6. Operating account balance (separate from trust) and the lowest point ahead.

Time recording

Unrecorded time can never be billed. Record time daily; weekly reconstruction loses a meaningful share, and the lost time is lost cash. Review WIP monthly and ask why any matter has unbilled time older than 60 days.

Billing

• Agree billing frequency and payment terms at engagement.
• Bill monthly on hourly matters, or at clear stages on fixed-fee work.
• Send bills promptly after month end or each milestone.
• Make bills clear and easy to pay online.
• Take money on account or retainers where permitted, and apply them as fees are earned under your jurisdiction’s rules.

Collections

Chase overdue bills weekly, starting with a reminder a few days after the due date. Fee earners often know clients best, so involve them in collection conversations. Agree payment plans for larger balances rather than letting them age. Report debtor days by fee earner monthly; what gets measured tends to get collected.

Trust money

Client money held in trust is not operating cash. Keep trust and operating accounts strictly separate, and only move money to the operating account when fees are earned, billed and transfer is permitted under your professional rules. Your operating cash forecast should never include trust balances.

Disbursements and case costs

Court fees, experts, searches and records are often paid by the firm and recovered from the client later. Bill disbursements promptly, ask for money on account for large ones, and track unbilled disbursements as part of WIP. Large expert fees on litigation matters can tie up significant cash if they aren’t funded by the client in advance.

Contingency matters

Contingency and success fees can be large but uncertain in timing. Forecast them only when settlement timing is reasonably certain, or keep them in a best-case scenario. Meanwhile, track the cost of time and disbursements invested in those matters; a large contingency portfolio can tie up significant cash for years.

Engagement terms that protect cash

Cash flow is easier to manage when the terms are right from the start. At engagement, agree the billing frequency, payment terms, money on account or retainers, how disbursements will be billed, and what happens if bills go unpaid. Clients who understand the terms upfront pay more reliably, and fee earners find it easier to raise overdue bills when the agreement is clear.

Fixed fees

Fixed-fee work can improve cash flow if fees are billed upfront or at early stages, and harm it if billed only on completion. Structure fixed fees with an initial payment and stage payments tied to clear milestones, and watch for matters where the work runs well beyond the fee.

Partner drawings

Set monthly drawings from cash the firm reliably generates, with a buffer for slow months and tax. Review them quarterly against the forecast. Drawings set from last year’s profit, when lockup has since risen, are a common cause of law firm cash strain.

A worked quarter

A firm’s forecast shows the operating account dipping below one month of costs in eight weeks, just before quarterly tax and the professional indemnity renewal. The monthly review finds WIP days have risen from 38 to 52, mainly on three large matters where bills weren’t sent at the agreed stages, and $65,000 of bills over 90 days, most from two clients.

Actions: interim bills go out on the three matters within the week; partners responsible for the two clients call them personally and agree payment plans; unbilled disbursements of $18,000 are billed. Within six weeks, $120,000 of additional cash is collected, lockup falls by about 15 days, and the forecast low point is comfortably above the buffer.

Annual costs

Professional indemnity insurance, practising certificates, bar or law society fees and some software licences are usually paid annually, often in the same few months. Put each in the forecast, and set aside a monthly amount so the renewals don’t coincide with a slow collections month unplanned.

Warning signs

• Lockup rising, especially WIP days
• Time recorded late or in bulk
• Bills over 90 days growing
• Disbursements unbilled for months
• Drawings maintained while cash falls
• Any temptation to rely on trust money for operating needs
• Fixed-fee matters running well over budget without the client being told
• Fee earners reluctant to discuss overdue bills with their clients

When cash gets tight

1. Bill all unbilled WIP that can be billed, including interim bills.
2. Chase the oldest and largest debts personally.
3. Bill outstanding disbursements.
4. Review partner drawings against the forecast.
5. Arrange a working capital facility with a clear repayment plan.

Tools

The premium Law Firm template includes a Billing & Collections tab that converts hourly billing into collections based on real client payment timing, lines for flat fees, retainers and contingency settlements, scenarios, and a dashboard. See also how to forecast receivables.